We examine how corporate employment responds to the time-varying cost of capital (COC) and cash flows (CFs) in the presence of heterogenous labor adjustment costs and financial constraints. We find that the firm-level COC negatively affects employment adjustments, especially for firms with lower adjustment costs and less financial constraints. Financially constrained firms with low adjustment costs adjust their employment more to CFs than to the COC. We provide causal evidence by exploiting several quasi natural experiments causing shocks to the COC or labor adjustment costs. Our findings suggest that both financial and labor market frictions play critical roles in employment decisions.