Financial and Labour Obstacles and Firm Employment: Evidence from Europe and Central Asia Firms

Abstract

This paper examines how obstacles in access to finance, labour regulations, and employment quality affect employment growth and the permanent worker ratio at the firm level. Using firm-level data of 11,691 firms in 33 low-income and middle-income countries in Europe and Central Asia, where unemployment rates are the highest worldwide, this paper demonstrates that access to finance and employment quality obstacles hinder employment growth. The paper also shows that the greater the obstacles in access to finance and labour regulations, the lower the permanent worker ratio. The findings are robust when applying a two-stage least-squares method to address endogeneity issues. Furthermore, quantile regression analysis shows that access to finance obstacles impede the lowest-growth firms the most and the highest-growth firms the least. Our results indicate that significant financial and regulatory reforms are needed to spur sustainable employment growth.