DP11677 Financial Shocks and Job Flows

Author(s):	Neil Mehrotra, Dmitriy Sergeyev
Publication Date:	December 2016
Keyword(s):	Financial Frictions, Job flows
JEL(s):	E44, J60
Programme Areas:	Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11677

We argue that the creation and destruction margins of employment (job flows) at the aggregate level and disaggregated across firm age and size can be used to measure the employment effects of disruptions to firm credit. Using a firm dynamics model, we establish that a tightening of credit to firms reduces employment primarily by reducing gross job creation, exhibiting stronger effects at new/young firms and middle-sized firms (20-99 employees). We find that 18% of the decline in US employment during the Great Recession is due to the firm credit channel. Using MSA-level job flows data, we show that the behavior of job flows overall and across firm size and age categories in response to identified credit shocks is consistent with our model's predictions and hold within tradable and non-tradable industries.