15 March 2021

Manpower Constraints and Corporate Policies

Well-equipped firms with growth potential in particular suffer from manpower constraints. This constraint varies significantly across time and industries, a novel insight of this data analysis. To reduce obstacles to a country's growth, in the short term, immigration policies can target the inflow of specialized labor; in the long term, more should be invested in educating the low-skilled segment of the population.

Key Issue

Shortage of qualified blue-collar workforce (manpower constraints) is a core challenge around the world and will become more pressing in developed economies as populations age and younger cohorts pursue academic degrees. The lack of qualified workers also plays a role in the political debate about immigration policies worldwide. Academic research has barely informed this debate so far because common datasets in economics and finance lack information on whether manpower constraints bind the operations and investment of individual firms. This lack of research on manpower constraints is striking also because contrary to financial constraints, which have been studied for decades, manpower constraints are difficult to relax: workers and skills cannot be redistributed across firms and locations easily. Our paper uses novel data to assess and measure empirically the effects of manpower constraints on firms’ operations.

Approach and Methodology

To study the effects of manpower constraints on corporate policies, we use unique data from the ifo institute to observe whether firms declare they face a shortage of specialized blue-collar workers alongside a set of expectations, plans and operations’ characteristics of firms. Specifically, we match the Business Expectations Panel and the Business Investment Panel to firms’ balance sheets. The panels includes manufacturing, trade and construction companies. To establish causality from manpower constraints to corporate policies, we use the exogenous diffusion of workers from former East Germany after the fall of the Berlin Wall as a differential shock to the relaxation of manpower constraints across German state.

Key Findings and Conclusions

We document—to the best of our knowledge, for the first time—that manpower constraints vary substantially over time and across industries. Moreover, firms that declare that they are manpower constrained have substantially higher capacity utilization, larger order backlogs, higher plans to enlarge their workforce and to invest in human and physical capital. These results suggest that, because building up skills and training takes time, immigration policies that restrict the inflow of specialized workers might constitute an impediment to countries’ growth.