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Financing constraints and unemployment: evidence from the Great Recession

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  • Burcu Duygan-Bump
  • Alexey Levkov
  • Judit Montoriol-Garriga

Abstract

This paper exploits the differential financing needs across industrial sectors and provides strong empirical evidence that financing constraints of small businesses are important in explaining the unemployment dynamics around the Great Recession. In particular, we show that workers in small firms are more likely to become unemployed during the 2007-2009 financial crisis if they work in industries with high external financing needs. According to our estimates, eliminating financial constraints of small firms could add up to 850,000 jobs to the economy. We suggest that policies aimed at making credit available to small businesses would significantly help stabilize the labor markets and economic activity in the U.S.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Risk and Policy Analysis Unit Working Paper with number QAU10-6.

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Date of creation: 2010
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Handle: RePEc:fip:fedbqu:qau10-6

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Keywords: Unemployment ; Small business - Finance ; Recessions ; Financial crises - United States;

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References

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  1. Efraim Benmelech & Nittai K. Bergman & Amit Seru, 2011. "Financing Labor," NBER Working Papers 17144, National Bureau of Economic Research, Inc.
  2. Neumark, David & Wall, Brandon & Zhang, Junfu, 2008. "Do Small Businesses Create More Jobs? New Evidence for the United States from the National Establishment Time Series," IZA Discussion Papers 3888, Institute for the Study of Labor (IZA).
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  4. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," Working Papers 10-17, Center for Economic Studies, U.S. Census Bureau.
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  7. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers, C.V. Starr Center for Applied Economics, New York University 93-02, C.V. Starr Center for Applied Economics, New York University.
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  9. Huang, Haifang & Stephens, Eric, 2011. "From Housing Bust to Credit Crunch: Evidence from Small Business Loans," Working Papers 2011-15, University of Alberta, Department of Economics.
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  15. Murillo Campello & John Graham & Campbell R. Harvey, 2009. "The Real Effects of Financial Constraints: Evidence from a Financial Crisis," NBER Working Papers 15552, National Bureau of Economic Research, Inc.
  16. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 82, Board of Governors of the Federal Reserve System (U.S.).
  17. Moscarini, Giuseppe & Postel-Vinay, Fabien, 2009. "Large Employers Are More Cyclically Sensitive," IZA Discussion Papers 4014, Institute for the Study of Labor (IZA).
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  19. Rebel A. Cole & John D. Wolken & R. Louise Woodburn, 1996. "Bank and nonbank competition for small business credit: evidence from the 1987 and 1993 national surveys of small business finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 983-995.
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Citations

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Cited by:
  1. Ray C. Fair, 2014. "The Financial Crisis and Macroeconomic Activity: 2008-2013," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1944, Cowles Foundation for Research in Economics, Yale University.
  2. Pu Liu & Yingying Shao, 2013. "Small business loan securitization and interstate risk sharing," Small Business Economics, Springer, Springer, vol. 41(2), pages 449-460, August.
  3. Siemer, Michael, 2014. "Firm Entry and Employment Dynamics in the Great Recession," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-56, Board of Governors of the Federal Reserve System (U.S.).
  4. Haltenhof, Samuel & Jung Lee, Seung & Stebunovs, Viktors, 2014. "The credit crunch and fall in employment during the Great Recession," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 43(C), pages 31-57.
  5. Kleemann, Michael & Wiegand, Manuel, 2013. "The causal effect of restrictive bank lending on employment growth: A matching approach," MPRA Paper 43529, University Library of Munich, Germany.
  6. Manuel Adelino & Song Ma & David T. Robinson, 2014. "Firm Age, Investment Opportunities, and Job Creation," NBER Working Papers 19845, National Bureau of Economic Research, Inc.
  7. Erdem Basci & Yusuf Soner Baskaya & Mustafa Kilinc, 2011. "Financial Shocks and Industrial Employment," Working Papers 1112, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  8. Thomas A. Garrett, 2011. "A Federal Reserve System conference on research in applied microeconomics," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 455-462.
  9. Michelle L. Barnes & N. Aaron Pancost, 2010. "Internal sources of finance and the Great Recession," Working Papers, Federal Reserve Bank of Boston 10-15, Federal Reserve Bank of Boston.
  10. Filipa Fernandes & Alexandros Kontonikas & Serafeim Tsoukas, 2014. "On the real effects of financial pressure: Evidence from euro area firm-level employment during the recent financial crisis," Working Papers, Business School - Economics, University of Glasgow 2014_09, Business School - Economics, University of Glasgow.

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