Report

The marginal propensity to hire

Abstract: When financial constraints bind, firms adjust employment in response to cash flow shocks. A 2010 revaluation of business rates, a United Kingdom tax levied on business-occupied properties, implied that similar firms, occupying similar properties in narrow geographical locations, experienced different tax changes. I find that, on average, for every £1 of additional cash flow triggered by the tax change, 39 pence were spent on employment, with small and leveraged firms responding the most. A general equilibrium model with firm heterogeneity and financial frictions rationalizes these findings, and quantitatively determines the aggregate effects of a fiscal transfer to firms.

JEL Classification: E24; E44; G32; E60;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2018-12-01

Number: 875

Note: Revised January 2026.