Financing constraints and unemployment: Evidence from the great recession

Abstract

Financing Constraints and Unemployment: Evidence from the Great Recession Working Paper No. QAU10-6 Burcu Duygan-Bump Federal Reserve Bank of Boston Alexey Levkov Federal Reserve Bank of Boston Judit Montoriol-Garriga Universitat Autonoma de Barcelona This paper can be downloaded without charge from: The Quantitative Analysis Unit of the Federal Reserve Bank of Boston http://www.bostonfed.org/bankinfo/qau/index.htm or EconPapers, hosted by the Swedish Business School at Örebro University: http://econpapers.repec.org/paper/fipfedbqu/ Financing Constraints and Unemployment: Evidence from the Great Recession* Burcu Duygan-Bump, Alexey Levkov, and Judit Montoriol-Garriga First Version: 8 October 2010 This Version: 14 December 2011 This paper exploits the differential financing needs across industrial sectors and provides strong empirical evidence that financing constraints of small businesses in the United States are important in explaining the unemployment dynamics during the Great Recession. We show that workers in small firms are more likely to become unemployed during the 2007-09 financial crisis if they work in industries with high external financing needs. We find very similar results for the 1990-91 recession, but not for the 2001 recession, where only the former was associated with a reduction in loan supply. These findings further support the credit constraints hypothesis. Keywords: Recession, Firm Size, Financial Dependence, Unemployment * Duygan-Bump and Levkov are …

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