Date Added: Jun 2011
This paper exploits the differential financing needs across industrial sectors and provides strong empirical evidence that financing constraints of small businesses in the United States are important in explaining the unemployment dynamics around the Great Recession. In particular, the authors show that workers in small firms are more likely to become unemployed during the 2008-2009 financial crisis if they work in industries with high external financing needs. According to their estimates, financial constraints of small firms increase the likelihood of unemployment by 0.55 percentage points during the crisis. They 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.