Discussion paper

DP11677 Financial Shocks and Job Flows

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.


Sergeyev, D and N Mehrotra (2016), ‘DP11677 Financial Shocks and Job Flows‘, CEPR Discussion Paper No. 11677. CEPR Press, Paris & London. https://cepr.org/publications/dp11677