Working Paper

The Credit Crunch and Fall in Employment during the Great Recession

Abstract: We study the existence and economic significance of bank lending channels that affect employment in U.S. manufacturing industries. In particular, we address the question of how a dramatic worsening of firm and consumer access to bank credit, such as the one observed over the Great Recession, translates into job losses in these industries. To identify these channels, we rely on differences in the degree of external finance dependence and of asset tangibility across manufacturing industries and in the sensitivity of these industries' output to changes in the supply of consumer credit. We show that household access to bank loans matters more for employment than firm access to local bank loans. Our results suggest that, over the recent financial crisis, tightening access to commercial and industrial loans and consumer installment loans explains jointly about a quarter of the drop in employment in the manufacturing sector. In addition, a decrease in the availability of home equity loans explains an extra one-tenth of the drop.

Keywords: Bank credit channels; bank lending standards; home equity extraction; credit crunch; employment; job losses; Great Recession;

JEL Classification: G21; G28; G30; J20; L25;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2014-02

Number: 2014-06