Credit and firms’ organization

We investigate how credit availability affects the organization of firms’ labor. We construct a firm-specific credit supply instrument derived from firm-bank credit linkages, and conduct an event study analyzing labor restructuring decisions within Portuguese firms. Our analysis uncovers a clear nexus between credit availability and labor adjustments. Specifically, firms that invest in machines and equipment are more sensitive to credit shortages. As a result, they tend to adjust their workforce by reducing the number of production and specialized workers closely associated with machine operations. These findings shed light on how credit dynamics shape labor decisions within firms, providing insights into aggregate responses to financial limitations.