Bank-Branch Expansion and Labor Market Outcomes: Evidence From India

Abstract

In 2005, the Reserve Bank of India (RBI) initiated a branch authorization policy reform that incentivizes banks to expand new branches in the “underbanked” districts defined as having a district population per bank branch higher than the national average. This paper uses a regression discontinuity design to explore the impacts of this bank branch expansion policy on labor market outcomes. Using RBI’s district-level banking data matched with household data from the National Sample Survey, I find that the bank branch expansion policy caused a statistically significant increase in individuals’ daily wage and weekly total labor earnings. I also find that the individuals are less likely to report being wage employees but more likely to report being self-employed as an employer, and in the non-agricultural sector, in the treatment districts relative to the control districts. However, there is no statistical-significant effect on the extensive margin of being self-employed in general. I observe that the decline in wage employment is mainly driven by the fall in the share of casual wage laborers.

Keywords: Financial Development, Banks, Labor Market

JEL Classification: J21, O16