Financing constraints and unemployment: Evidence from the Great Recession |
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| Affiliation: | 1. Division of Monetary Affairs Board of Governors of the Federal Reserve System, United States;2. The Clearing House, 1114 Avenue of the Americas, New York, NY 10036, United States;3. La Caixa Research Department, Spain;1. University of Zurich, Department of Banking and Finance, Switzerland;2. European Central Bank, Germany;3. Swiss Finance Insitute, Switzerland;4. University of Zurich, Department of Business Administration, Switzerland;1. CER-ETH - Center of Economic Research at ETH Zurich, Zürichbergstrasse 18, 8092 Zurich, Switzerland;2. CEPR, United Kingdom;1. Department of Economics, Concordia University, 1455 de Maisonneuve Blvd. West, Montréal, QC Canada H3G 1M8;2. CIREQ, Montréal, QC, Canada;3. Department of Economics, National University of Mongolia, Baga Toiruu 4, Ulaanbaatar, Mongolia;1. International Monetary Fund and Joint Vienna Institute, Austria;2. Rutgers University and NBER, United States;1. Federal Reserve Bank of Chicago and NBER, United States;2. The World Bank, United States;3. Washington University in St. Louis, Federal Reserve Bank of St. Louis, and NBER, United States |
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| Abstract: | This paper shows that financing constraints of small firms were one of the drivers of unemployment dynamics during the 2007–2009 recession in the United States. Specifically, workers in small firms were more likely to become unemployed during the 2007–2009 recession than comparable workers in large firms, but only if they were employed in industries with high financing needs. We find very similar results for the 1990–1991 recession, but not for the 2001 recession, where only the former was associated with a reduction in loan supply. The findings support the credit constraints hypothesis and underscore the role of bank lending in explaining labor market activity. |
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| Keywords: | Great Recession Firm size Financial dependence Unemployment |
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