02344cas a2200241 a 4500 AALejournalIMF009272 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451866841 1018-5941 BD-DhAAL BD-DhAAL Bennett, Herman. Labor's Liquidity Service and Firing Costs / Herman Bennett. Washington, D.C. : International Monetary Fund, 2007. 1 online resource (34 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students This paper proposes a new effect of firing costs on firms' behavior that builds from firms' demand for liquidity. When a time gap exists between production and its associated revenues, firing can become a liquidity adjustment tool that allows firms to increase their short-term liquidity. I refer to this feature as labor's liquidity service. The presence of firing costs reduces the value of labor's liquidity service, which affects firms' demand for liquidity, and thus, firms' demand for inputs. In addition to this negative effect at the creation margin, I also show that firing costs imply relatively higher destruction for financially restricted firms. I present a model that develops these ideas and show that the presence of firing costs has a stronger negative effect on production levels of firms facing liquidity constraints. Regression analysis, based on country industry panel data sets, provides empirical evidence in line with the liquidity service effect of firing costs proposed. I reject the hypothesis that the effect of firing costs does not depend on the presence of financial restrictions. I find a relatively stronger negative effect of firing costs on the output of industries with higher liquidity requirements and a relatively stronger negative effect of firing costs on the output of small firms. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2007/120 Full text available on IMF http://elibrary.imf.org/view/journals/001/2007/120/001.2007.issue-120-en.xml IMF e-Library