I study how firms adapt to exogenous changes in labor costs. To identify this effect, I exploit that industries in Sweden have a centrally bargained minimum increase in average wages each year. Since these are bargained on the industry-level, they are detached from the growth prospects of individual firms. Data on centralized wage increases for the years from 2001 to 2006 are combined with administrative panel data on firms. I then compare the growth rates of firms in related industries that face different centralized wage increases, while controlling for differences in growth trends. Higher centralized wage increases cause the average firm to increase sales and employment growth. These effects come from increased investments and hiring. In addition, firms increase their share of skilled labor. Moreover, the effects on employment are larger for large firms. This suggests that higher centralized wage increases also cause a reallocation of labor. These results are consistent with frictions and imperfect competition in the labor market.
While managing risks is central for all firms it is of particular importance for smaller and medium size firms. Large firms are naturally diversified and they have access to financial markets, which allows them to smooth out shocks. Compared to large firms, the risk management strategies of small and medium-sized firms is mostly unknown, due to the lack of data. We use a unique data set on firms' insurance purchases, combined with administrative tax data to document risk management behavior in a large, representative sample of Swedish firms. We find that credit constrained firms purchase more insurance relative to assets in the cross-section and panel analysis, which is consistent with the empirical literature. However, this relationship breaks down if we use a clean regression-discontinuity design to isolate credit constraints from other confounding variables. An exploratory analysis reveals that this result is likely due to the fact that our causal estimate comes from financially stable firms, that already have efficient risk management in place.