Labor market effects of a credit crunch: an analysis based on microdata

• Grant number: 18/20914-0
• Support Opportunities: Scholarships abroad - Research
• Start date: January 14, 2019
• End date: June 29, 2019
• Field of knowledge: Applied Social Sciences - Economics - Fiscal and Monetary Policies
• Principal Investigator: Marco Antonio Cesar Bonomo
• Grantee: Marco Antonio Cesar Bonomo
• Host Investigator: Heitor Vieira de Almeida Neto
• Host Institution: Instituto de Ensino e Pesquisa (Insper). São Paulo , SP, Brazil
• Institution abroad: University of Illinois at Urbana-Champaign, United States

Abstract

This paper investigates the transmission of a credit crunch to the labor market. We explore the effects of the 2008-9 international financial crisis in Brazil. The contagion, arguably exogenous to financial and labor market conditions, happened despite the credit market being dominated by solid banks. Building upon a unique data set that connects banks to firms and firms to workers, we are able to investigate the whole transmission chain from banks to workers. The SCR data (from the Brazilian central bank) contains all loans from banks to firms (except the very small ones), and RAIS has detailed labor market for all formal firms and workers. We start by documenting the transmission of the credit crunch to firms. We construct exogenous variation in credit supply to firms by exploring firms' relationship with banks before the crisis and how severe the credit supply from banks were affected, in the same lines of Bartik (1991). Since banks' supply of credit also depend on their own characteristics (eg., liquidity), we additionally consider an instrumental variable strategy exploring some of banks' characteristics (eg. liquidity) at the time the crisis hits. Our preliminary results show that the credit crunch had a statistically and economically significant effect on the supply of credit to firms. Thus, firms that were connected to banks that suffered a liquidity shock, had their credit supply reduced more than firms that were connected to banks that did not suffer a liquidity shock. Next, we can use also our instrumented credit variable in order to study the effect of the credit supply shock on firm-level variables as employment. Our preliminary results indicated that firms that suffer a large credit supply shock had an economically and statistically significant larger reduction on employment. This heterogeneous effect on firms engenders a heterogenous impact on the labor market, since workers have a yet more sticky relationship with firms than firms with banks. The last stage is then to relate workers level variables, as wage, separation, unemployment spell, to the credit supply shock in the firm she was working when the credit crunch hit, as well as the interaction of the latter variable with workers characteristics. Thus, we could answer questions like the ones that follow. Did less educated workers have a higher probability of being fired than a more educated worker when the firm that hired them suffered a credit supply shock?