Employment behavior and the economic crisis: Evidence from winners and runners-up in procurement auctions

To estimate the differential effects of increased product demand on the demand for labor before and during the recent economic crisis, we use a combination of detailed employment data and the outcomes of public procurement auctions. We compare the employment reactions of the winner of an auction with the employment reactions of the second ranked firm (i.e., the runner-up firm). Assuming similar ex-ante winning probabilities for both firms, we view winning an auction as an exogenous shock to a firm's production and its demand for labor. Detailed daily employment data cover almost 600 construction firms and over 2500 auctions in Austria over the time period 2006 to 2009. Our main results show that the winning firm significantly increases labor demand in the weeks following an auction but only in the years before the recent economic crisis. It employs about 80 workers (around 3 more after the auction than the runner-up firm. Most of the adjustment takes place within one month after the demand shock. Winners predominantly fire fewer workers after winning than runner-up firms. In the crisis, however, firms do not employ more workers than their competitors after winning an auction. There are no effects on wages. We view labor hoarding and productivity improvements induced by the crisis as the most likely explanations for our findings. We also discuss implications for fiscal and stimulus policy in the crisis.