Labor Unemployment Insurance and Bank Loans

Abstract

I investigate the influence of unemployment insurance (UI) benefits on the cost of bank loans by exploiting changes in state unemployment insurance laws as a source of variation in labor unemployment costs. The evidence shows that the cost of bank loans is significantly lower for firms headquartered in states with more generous UI programs. The relation between UI benefits and cost of bank loans is more pronounced for firms that face higher unionization, are more labor intensive, and have higher layoff propensity. These results are robust to controlling for loan characteristics, macroeconomic conditions, borrower characteristics and using fixed effect regressions. I also find further evidence of a causal relation between UI benefits and the cost of bank loans through a difference-in-differences (DID) approach. Overall, results suggest that the credit market evaluates workers’ unemployment costs while approving and pricing loan contracts.

Keywords: Labor unemployment insurance; compensating wage differentials; cost of bank loans; total cost of borrowing

JEL Classification: G21, G32, J31, J65