Banking on Snow: Bank Capital, Risk, and Employment

This paper analyzes how quasi-fixed employment responds to labor productivity risk. We use highly granular data on small firms employing workers whose productivity depends on weather conditions. This allows us to analyze effects of exogenous fluctuations in labor productivity risk, induced by weather risk. We find that the risk reduces firms' quasi-fixed employment, with a stronger effect in locations where regional banks have relatively little equity capital. We also find that in these locations the banks' borrowers receive less liquidity from their banks if the locations are subject to adverse weather shocks. Bank capitalization influences small firms' capacity to take labor productivity risk by changing their access to liquidity "insurance". Well-capitalized banks support economic adaptation to weather-induced labor productivity risk.