This paper studies adjustments of Italian firms to negative labor supply shocks in the context of worker outflows from Italy to Switzerland. My diff-in-diff analysis leverages a policy in which Switzerland granted free labor market mobility to EU citizens and a different degree of treatment of Italian firms based on their distance from the Swiss border.
I document that firms close to the border have larger outflows of workers (around 0.5 percentage points per year) relative to firms further away from the border. Despite replacing workers and becoming more capital intensive, they are less productive (both in terms of value added per employee and total productivity) and pay lower wages per capita. I provide persuasive evidence that high-skill intensive firms suffer most of the negative effects on wages and productivity likely driven by a lack of firm-specific human capital. Moreover, the net variation in the number of firms is lower in areas closer to the border.
