Lockdown, employment adjustment, and financial frictions

We examine firms’ employment adjustments immediately after the imposition of stringent lockdown in March 2020. In doing so, we use monthly administrative data, and take value-added tax payment changes as a proxy for demand shock. merge data with COVID-19 tests, classified by economic activity, employ fixed effects instrumental variable regression. find that all sized firms manufacturing sector reduced more if they had uncovered liabilities before lockdown. Among small firms, real estate service downsized rapidly. While are rather modest, this very early evidence points to need address liquidity needs firm pre-conditions among capital-intensive services and, particular, businesses, avoid losses. Plain English Summary The from first 2020 point requirements manufacturers, businesses subsequent there is vast literature on adaptation face adverse shocks, reactions macroeconomic implications stringent, government-imposed lockdowns much less understood due their novelty. analyze businesses’ responses making taking exploit variation sectoral differences across small, medium, large firms. A simple average adjustment was non-negative agriculture, construction, information communication, public administration sectors our sample. By merging employing fixed-effects regression, about COVID-19-induced uncertainty activity restrictions business on. Another policy message concerns importance