Do Credit Supply Shocks Affect Employment in Middle-Income Countries?

41 Pages Posted: 22 Mar 2021

See all articles by David Jaume

David Jaume

Banco de México

Emilio Gutierrez

Instituto Tecnológico Autónomo de México (ITAM)

Martín Tobal

Banco de Mexico

Date Written: March 16, 2021

Abstract

This paper studies the extent to which increases in bank credit supply available for small and medium firms can foster formal employment in Mexico. We use a detailed dataset containing loan-level information for all loans extended by commercial banks to private firms in Mexico during the 2010-2016 period, when the economy was relatively stable. To obtain exogenous variation in credit supply, we exploit differences in the regional presence of Mexican banks across local labor markets by combining pre-existing market shares with national-level changes in banks’ credit supply, after accounting for local credit demand shocks. Then, we use employment registry data to compare changes in the number of formal workers registered by small and medium firms in local labor markets differently exposed to these shocks. We find that credit supply shocks have a large impact on formal employment: a positive credit shock of one standard deviation increases yearly employment growth by 0.45 percentage points (13 percent of the mean). Our results differ from the null to small effects identified by previous literature for developed countries, suggesting that credit supply shocks play a more prominent role for employment creation (and destruction) in low and middle-income countries.

Keywords: Credit supply shocks, local labor market, formal employment.

JEL Classification: D22, D53, G01, G1, G21, J01, J23

Suggested Citation

Jaume, David and Gutierrez, Emilio and Tobal, Martín, Do Credit Supply Shocks Affect Employment in Middle-Income Countries? (March 16, 2021). Available at SSRN: https://ssrn.com/abstract=3805903 or http://dx.doi.org/10.2139/ssrn.3805903

David Jaume (Contact Author)

Banco de México ( email )

Av 5 de Mayo 2
Colonia Cuahtemoc
Ciudad de México, 06000
Mexico

Emilio Gutierrez

Instituto Tecnológico Autónomo de México (ITAM) ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, CDMX 10700
Mexico

Martín Tobal

Banco de Mexico ( email )

Ave Cinco de Mayo 1
Col. Centro
Mexico City, Mexico DF 06059
Mexico

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