Financial Shocks and Industrial Employment

By using the U.S. NBER-CES industry-level data for the 1962-2005 period, we analyze how exogenous changes in firms'borrowing costs, measured by the spread between Baa and Aaa rated corporate bonds, affect employment dynamics and whether external finance dependence differences across industries lead to different employment responses to financial shocks. In order to identify the exogenous changes in the spreads, we use an index based on the exogenous economic and non-economic events provided by Bloom (2009). Our estimates suggest that a 1-standard deviation exogenous increase in the cost of borrowing, corresponding to a 0.28 percentage point increase in spreads, reduces employment growth by 0.39-0.70 percent for the industries at the median of external finance dependence distribution, depending on the specification. We also find that the industries with higher external finance dependence face higher employment losses following adverse financial shocks. Finally, our out of sample forecasts for the 2008-2009 crisis imply that the increase in spreads between August 2008 and December 2008 can generate a 4.7-5.8 percent decline in manufacturing industry employment, keeping all other factors constant, where the actual decline was 11.4% for 2009.