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Financing needs, firms and jobs

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The effects of financial crisis on aggregate employment at the firm or state level, it is generally silent about within-firm dynamics and labor reallocation. For instance, little is known about the impact of a decline in firm financing on different types of jobs, even though a differential impact of the crisis across demographic groups would have distributional implications. Moreover, the employment adjustment within firms between workers and jobs characterized by different skill content can have an effect on aggregate productivity.

The labor market effects of the crisis have not been uniform, and young and less educated workers have been particularly hit by the crisis. On the other side, the employment effects of the credit crunch have been heterogeneous across firms: smaller, younger and less productive firms and those with higher debt overhang and weaker bank-firm relationships have been more vulnerable to the (negative) impact of the credit crunch on employment.

Understanding which jobs and workers are more exposed to the real effects of large financial shocks provides useful insights to better understand how firms re-organize themselves at times of crisis and can inform the debate on the distributional consequences and the possible cleansing effect of financial crises.

By estimation, from the data from Italian Credit Register the study prepared to explain and present the links between financing needs and effects of the financial crisis, which is expressed with the decrease of employment index finds that a 10 percent supply-driven credit contraction reduces employment by 3.6 percent. This effect is the result of adjustments at the intensive and extensive margins, is concentrated among workers with temporary contracts, and occurred mostly through increased outflows rather than decreased inflows. These results are in line with the existence of a ?dual? labor market where temporary contracts absorb large part of the employment volatility. The reduction in employment is concentrated among relatively less educated individuals and low skill occupations, and happened mostly by allowing temporary contracts to expire.

By contrast, less educated workers with open-ended contracts are almost unaffected by tighter firms? financing constraints, possibly because of higher firing costs and a rigid employment protection legislation. Thus, skill upgrading strategies are heavily shaped by contract regulation. These differential effects are mainly driven by the adjustment at the intensive margin, while the effects on employment due to firm exit are more homogeneous across contracts and workers. The study also finds that immigrant and young workers are hit disproportionately more by the credit shock, reflecting the prevalence of immigrants in low-skill occupations, and the lower tenure and the higher presence of younger workers in temporary jobs.

The effect of the shock is concentrated among firms that entered the crisis with a lower credit rating, a higher debt overhang, and that have weaker relationships with banks. These results are consistent with the idea that firm balance sheets play a key role in the propagation of shocks, as highly levered firms find more costly to engage in labor hoarding when financially constrained.

While these outcomes raise important distributional concerns, it has been argued that crises could also have a ?cleansing? effect to the extent that the least productive jobs and firms are the ones relatively more affected by the financial shock. These developments have triggered a renewed interest on the relationship between finance and employment and, specifically, on the effects of credit supply shocks have on firms? employment decisions.

The analysis has the advantage of bringing together three key elements which in previous studies have been considered separately.

First, the availability of loan-level data (instead of aggregate credit data) allows to identify the bank lending channel at the firm-level. Moreover, those data make it possible to control for credit demand and productivity shocks at a granular level, with a set of firm, time, and firm cluster ? time fixed effects, which absorb firm specific time invariant demand shifters and time-varying demand shocks that are common to a narrowly defined cluster of borrowers.

Second, thanks to contract-firm-bank matched data, the investigation of heterogeneous responses to a financial shock across firms, workers, and job contracts. In particular, other than socio-demographic characteristics, the analyse can exploit differences across contract types and look at the intersection between individual skills and job contracts, to assess which of the two dimensions matter more for firm?s employment decisions.

Finally, the analysis covers the universe of firms. While there is a wide consensus on the fact that smaller firms rely more on bank financing, the existing evidence rarely focuses on a representative sample of small firms. The data, on the contrary, include the universe of individual and micro enterprises and this allows us to have a more precise (and larger) estimate of the employment effect of financial shocks.

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