Emanuele Dicarlo (Bank of Italy)
This paper studies how firm adjustment to outflows of workers depends on the state of the local labor market and possibly the shock size. My difference-in-differences analysis leverages the gradual liberalization of the Swiss labor market for EU citizens, that generated an exogenous negative labor supply shock for Italian firms, with treatment intensity defined by their distance from the border. Using detailed social security data, I document a large outflow of workers and a sharp increase in turnover. In smaller, more constrained labor markets close to the border, surviving firms suffer immediate productivity losses and later adopt a cost-saving strategy by mitigating wage growth. In contrast, firms in wider markets further from the border, facing a weaker shock, do not experience a decline in productivity and are able to increase wages for incumbent workers. The negative effects are concentrated in high-skill intensive firms, consistent with higher turnover costs and the loss of firm-specific human capital in tighter labor markets. These outcomes can be rationalized within a standard competitive model in the presence of labor market imperfections.