Working Paper

Financing constraints and unemployment: evidence from the Great Recession

Abstract: This paper exploits the differential financing needs across industrial sectors and provides strong empirical evidence that financing constraints of small businesses are important in explaining the unemployment dynamics around the Great Recession. In particular, we show that workers in small firms are more likely to become unemployed during the 2007-2009 financial crisis if they work in industries with high external financing needs. According to our estimates, eliminating financial constraints of small firms could add up to 850,000 jobs to the economy. We suggest that policies aimed at making credit available to small businesses would significantly help stabilize the labor markets and economic activity in the U.S.

Keywords: Unemployment; small business finance; Recessions; Financial crises - United States;

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Supervisory Research and Analysis Working Papers

Publication Date: 2010

Number: QAU10-6