Financial Dependence, Formal Credit, and Informal Jobs: New Evidence from Brazilian Household Data

Luis Catão (), Carmen Pages and Maria Rosales-Rueda

No 4609, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper examines a much overlooked link between credit markets and formalization: since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost; if so, well-functioning credit markets help foster formal employment at the expense of informal jobs. We gauge the relevance of this credit channel using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil – a large emerging market where substantial changes in banking system depth and formalization ratios have taken place and for which consistent data exists. Our results show that formalization rates increase with financial deepening and the more so in sectors where firms are typically more dependent on external finance. We also decompose shifts in aggregate formalization into those within each firm size category and those associated with changes in firm size, and find that financial deepening significantly explains the former but not so much the latter.

Keywords: credit markets; financial dependence; informality; Brazil (search for similar items in EconPapers)
JEL-codes: E26 G21 O16 O4 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2009-12
New Economics Papers: this item is included in nep-ban, nep-dev and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Related works:
Working Paper: Financial Dependence, Formal Credit and Informal Jobs: New Evidence from Brazilian Household Data (2009)
Working Paper: Financial Dependence, Formal Credit and Informal Jobs - New Evidence from Brazilian Household Data (2009)
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