Firms’ liquidity and employment decisions: Evidence from Australia

Using rich panel data on Australian firms, this study examines how financial liquidity and constraints influence both total employment creation and the composition of employment types. We consider specifically the balance between flexible arrangements (casual, part-time, and outsourced positions) and more stable forms of employment (permanent, full-time positions). Our findings reveal that financial constraints generally suppress employment growth, though this effect varies significantly by firm age and size. Financial liquidity enhances total employment growth across all firms, with pronounced effects among younger companies. Moreover, liquidity proves beneficial for employment expansion in firms experiencing financial constraints due to rapid growth trajectories. Beyond those effects, we demonstrate that financial conditions shape the types of jobs firms create. Higher liquidity promotes the establishment of stable employment relationships – specifically non-casual and full-time positions – while simultaneously reducing reliance on flexible employment arrangements such as casual and part-time work. These relationships remain robust across multiple econometric specifications and causality tests. The policy implication is that liquidity injection mechanisms can serve dual purposes during credit crises by not only stimulating overall job creation but also encouraging the development of more secure employment opportunities. This suggests that targeted financial interventions may help mitigate both the quantity and quality dimensions of employment disruption during economic downturns.