Financing constraints and unemployment: Evidence from the Great Recession

This paper shows that financing constraints of small firms were one of the drivers of unemployment dynamics during the 2007-2009 recession in the United States. Specifically, workers in small firms were more likely to become unemployed during the 2007-2009 recession than comparable workers in large firms, but only if they were employed in industries with high financing needs. We find very similar results for the 1990-1991 recession, but not for the 2001 recession, where only the former was associated with a reduction in loan supply. The findings support the credit constraints hypothesis and underscore the role of bank lending in explaining labor market activity.