Financial frictions and employment during the Great Depression

Efraim Benmelech, Carola Frydman and Dimitris Papanikolaou

Journal of Financial Economics, 2019, vol. 133, issue 3, 541-563

Abstract: We provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the Great Depression using a novel, hand-collected dataset of large industrial firms. Our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze. Local bank failures inhibited firms’ ability to substitute public debt for private debt, which exacerbated financial constraints. We estimate a large and negative causal effect of financing frictions on firm employment. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.

Keywords: Credit; Financial constraints; Labor; Unemployment; Great Depression (search for similar items in EconPapers)
JEL-codes: E44 G32 N22 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (75)

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Working Paper: Financial Frictions and Employment during the Great Depression (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:133:y:2019:i:3:p:541-563

DOI: 10.1016/j.jfineco.2019.02.005

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