Do Credit Supply Shocks Constrain Employment Growth of Small and Medium-Sized Enterprises?

Baslandze, Salomé; Minoiu, Camelia; Penciakova, Veronika; Willis, Jonathan L.

doi:10.29338/ph2023-5

Journal Article

Do Credit Supply Shocks Constrain Employment Growth of Small and Medium-Sized Enterprises?

Abstract: Small and medium-sized enterprises (SMEs) made outsized contributions to net employment growth during the pandemic recession and recovery. However, credit conditions have tightened significantly during the past year and might hinder growth for small firms going forward. Using data on bank lending to small businesses and employment growth, we estimate that a tightening in bank credit supply of 1 percentage point is associated with an 11 percent decline in SMEs' net job creation rate. This estimate indicates that a bank credit tightening about one-third the size of the tightening observed during the Great Recession would reduce overall net job creation by approximately 285,000 jobs between March 2023 and March 2024.

Keywords: small and medium-sized enterprises; employment; credit supply; bank lending;

JEL Classification: E24; E3; G21; J2; L2;

https://doi.org/10.29338/ph2023-5