Financial shocks and job flows

Author / Creator

Mehrotra, Neil, author

Available as

Online

Summary

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 disru...

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.

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