Heterogeneous Effects of Credit Constraints on Smes' Employment: Evidence from the Great Recession

35 Pages Posted: 29 Jan 2018

See all articles by David Cornille

David Cornille

National Bank of Belgium

Francois Rycx

Université Libre de Bruxelles (ULB) - Department of Applied Economics (DULBEA); IZA Institute of Labor Economics

Ilan Tojerow

Université Libre de Bruxelles (ULB) - Department of Applied Economics (DULBEA); IZA Institute of Labor Economics

Abstract

This paper takes advantage of access to detailed matched bank-firm data to investigate whether and how employment decisions of SMEs have been affected by credit constraints in the wake of the Great Recession. Variability in banks' financial health following the 2008 crisis is used as an exogenous determinant of firms' access to credit. Findings, relative to the Belgian economy, clearly highlight that credit matters. They show that SMEs borrowing money from pre-crisis financially less healthy banks were significantly more likely to be affected by a credit constraint and, in turn, to adjust their labour input downwards than pre-crisis clients of more healthy banks. These results are robust across types of loan applications that were denied credit, i.e. applications to finance working capital, debt or new investments. Yet, estimates also show that credit constraints have been essentially detrimental for employment among SMEs experiencing a negative demand shock or facing strong product market competition. In terms of human resources management, credit constraints are not only found to foster employment adjustment at the extensive margin but also to increase the use of temporary layoff allowances for economic reasons. This outcome supports the hypothesis that short-time compensation programmes contribute to save jobs during recessions.

Keywords: SMEs, banks' financial health, credit constraints, employment, short-time compensation programmes, Great Recession, matched bank-firm data

JEL Classification: C35, C36, D22, G01, G21, J21, J23

Suggested Citation

Cornille, David and Rycx, François and Tojerow, Ilan, Heterogeneous Effects of Credit Constraints on Smes' Employment: Evidence from the Great Recession. IZA Discussion Paper No. 11257, Available at SSRN: https://ssrn.com/abstract=3111111 or http://dx.doi.org/10.2139/ssrn.3111111

David Cornille (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

François Rycx

Université Libre de Bruxelles (ULB) - Department of Applied Economics (DULBEA) ( email )

Ave. Franklin D Roosevelt, 50
Brussels, B-1050
Belgium
+32 0 2 6504110 (Phone)
+32 0 2 6503825 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ilan Tojerow

Université Libre de Bruxelles (ULB) - Department of Applied Economics (DULBEA) ( email )

Ave. Franklin D Roosevelt, 50
Brussels, B-1050
Belgium

HOME PAGE: http://homepages.ulb.ac.be/~itojerow/

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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