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

David Cornille (), Francois Rycx and Ilan Tojerow
Additional contact information
David Cornille: National Bank of Belgium

No 11257, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 (search for similar items in EconPapers)
JEL-codes: C35 C36 D22 G01 G21 J21 J23 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2018-01
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-eur and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published - published as 'Heterogeneous Effects of Credit Constraints on SME's Employment: Evidence from the European Sovereign Debt Crisis' in : Journal of Financial Stability, 2019, 41, 1-13

Downloads: (external link)
https://docs.iza.org/dp11257.pdf (application/pdf)

Related works:
Working Paper: Heterogeneous Effects of Credit Constraints on SMEs’ Employment: Evidence from the Great Recession (2018)
Working Paper: Heterogeneous Effects of Credit Constraints on SMEs’ Employment: Evidence from the Great Recession (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp11257

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().