A common explanation for the poor performance of entrepreneurs in developing economies is their inability to obtain credit to expand their scale of operation. This paper assesses the aggregate impacts of the Cartão BNDES, a credit line targeted at small and medium enterprises (SMEs) in Brazil, to investigate the role of credit constraints on SMEs performance. We use a major expansion of credit supply within the line to estimate causal effects of credit supply on firm size distribution, entry and exit, and employment. By exploiting the fact that firms can only use the available credit with suppliers that are registered in the credit line's system, we construct a variable that capture a credit supply expansion that varies exogenously across regions. We use an instrumental variable estimator that exploits differential access to the line and the expansion of suppliers to recover these causal effects. Our main result points that a 1% increase in the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social - BNDES) card loans has a positive effect on average local formal employment between 6.7% and 10.3%. This increase in employment is driven by the increase in the average size of firms, specially by the average size of new entrant firms. These are relevant results as they suggest that the type of credit provided by BNDES card foster the dynamics of local labor markets, increasing the entrance of new firms, which are pointed as the group most affected by credit constrains.

A provocative argument that unless Europe takes serious action soon, its economic and political decline is unavoidable, and a clear statement of the steps Europe must take before it's too late. Unless Europe takes action soon, its further economic and political decline is almost inevitable, economists Alberto Alesina and Francesco Giavazzi write in this provocative book. Without comprehensive reform, continental Western Europe's overprotected, overregulated economies will continue to slow—and its political influence will become negligible. This doesn't mean that Italy, Germany, France, and other now-prosperous countries will become poor; their standard of living will remain comfortable. But they will become largely irrelevant on the world scene. In The Future of Europe, Alesina and Giavazzi (themselves Europeans) outline the steps that Europe must take to prevent its economic and political eclipse. Europe, the authors say, has much to learn from the market liberalism of America. Europeans work less and vacation more than Americans; they value job stability and security above all. Americans, Alesina and Giavazzi argue, work harder and longer and are more willing to endure the ups and downs of a market economy. Europeans prize their welfare states; Americans abhor government spending. America is a melting pot; European countries—witness the November 2005 unrest in France—have trouble absorbing their immigrant populations. If Europe is to arrest its decline, Alesina and Giavazzi warn, it needs to adopt something closer to the American free-market model for dealing with these issues. Alesina and Giavazzi's prescriptions for how Europe should handle worker productivity, labor market regulation, globalization, support for higher education and technology research, fiscal policy, and its multiethnic societies are sure to stir controversy, as will their eye-opening view of the European Union and the euro. But their wake-up call will ring loud and clear for anyone concerned about the future of Europe and the global economy.

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database covering all the credit relationships of Italian corporations, together with a natural experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate a production model augmented with financial frictions. We find that a contraction in credit supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation, exporting, and adoption of superior management practices, while a credit expansion has limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for about a quarter of observed the decline in TFP.

We use payroll data on over 1 million workers at 80,000 small firms to construct county-month measures of employment, hours, and wages that correct for dynamic changes in sample composition in response to business cycle fluctuations. We use this to estimate the response of small firms' employment, hours and wages following tighter local labor market conditions. We find that employment and hours per worker fall and wages rise. This is consistent with the predictions of the response to a demand shock in the well-known “jobs ladder” model of labor markets. To check this interpretation, we show our results hold when instrumenting for local demand using county-level Department of Defense contract spending. Correction for dynamic sample bias is important -- without it, the hours fall by only one third as much and wages increase by double.

Local labor market shocks are difficult to insure against. Using confidential micro data from the U.S. Census Bureau's Longitudinal Business Database, we document that firms redistribute the employment impacts of local demand shocks across regions through their internal networks of establishments. During the Great Recession, the massive decline in house prices caused a sharp drop in consumer demand, leading to large employment losses in the non-tradable sector. Consistent with firms smoothing out the impacts of these shocks across regions, we find large elasticities of non-tradable establishment-level employment with respect to house prices in other counties in which the firm has establishments. At the same time, establishments of firms with larger regional networks exhibit lower employment elasticities with respect to local house prices in the establishment's own county. To account for general equilibrium adjustments, we aggregate non-tradable employment at the county level. Similar to what we found at the establishment level, we find that non-tradable county-level employment responds strongly to local demand shocks in other counties linked through firms' internal networks. These results are not driven by direct demand spillovers from nearby counties, common shocks to house prices, or local demand shocks affecting non-tradable employment in distant counties indirectly via the trade channel. Our results suggest that firms play an important role in the extent to which local labor market risks are shared across regions.

Using business registry data from China, we show that internal capital markets in business groups can propagate corporate shareholders’ credit supply shocks to their subsidiaries. An average of 16.7% local bank credit growth where corporate shareholders are located would increase subsidiaries investment by 1% of their tangible fixed asset value, which accounts for 71% (7%) of the median (average) investment rate among these firms. We argue that equity exchanges is one channel through which corporate shareholders transmit bank credit supply shocks to the subsidiaries and provide empirical evidence to support the channel.

This paper studies the long term consequences on workers' labour earnings of the credit crunch induced by the 2007-2008 financial crisis. We study the evolution of both employment and wages in a large sample of Italian workers followed for nine years after the start of the crisis. We rely on a unique matched bank-employer-employee administrative dataset to construct a firm-specific shock to credit supply, which identifies firms that, because of the collapse of the interbank market during the financial crisis, were unexpectedly aected by credit restrictions. We find that workers who were employed before the crisis in firms more exposed to the credit crunch experience persistent and sizable earnings losses, mainly due to a permanent drop in days worked. These effects are heterogeneous across workers, with high-type workers being more affected in the long run. Moreover, firms operating in areas with favorable labor market conditions react to the credit shock by hoarding high-type workers and displacing low-type ones. Under unfavorable labor market conditions instead, firms select to displace also high-type (and therefore more expensive) workers, even though wages do react to the slack. All in all, our results document persistent eects on the earnings distribution.