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Financing constraints and unemployment: evidence from the Great Recession

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

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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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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