Access to Finance and Job Growth: Firm-Level Evidence across Developing Countries
Meghana Ayyagari, Pedro Juarros, Maria Soledad Martinez Peria, Sandeep Singh
Review of Finance, Volume 25, Issue 5, September 2021, Pages 1473–1496, https://doi.org/10.1093/rof/rfab003
While an extensive literature exists on how finance can affect corporate investment and economic growth, comparatively little is known about the effect of finance on labor market outcomes. A priori, it is not clear that increasing access to finance should readily lead to employment growth. Firms may grow by increasing investment, without ever increasing labor, a case of “jobless growth”. Or conversely, financial constraints need not affect labor directly, since unlike capital, labor does not require financing. On the other hand, the theoretical literature on capital-labor market linkages suggests that labor has a fixed cost component that requires financing to bridge upfront costs associated with training and hiring and so we should expect to see credit markets affect firm employment decisions.
This paper uses data for 780,000 firms across 22 developing countries to analyze empirically the impact of access to finance on job growth and the heterogeneity in this relationship across firm size. In particular, we study the differential impact of access to finance on micro and small enterprises (MSMEs)’ ability to create jobs relative to that of larger firms.
We pursue a number of empirical strategies to identify the effect of access to finance on job growth. First, we consider an exogenous shock to the supply of credit in the form of the introduction of a credit bureau (CB). We use a difference-in-difference approach in estimating the impact of the introduction of CBs on employment growth, by comparing the coverage of the CB in countries which introduced CBs and countries which did not, and years pre- and post-credit bureau introduction. Second, we use propensity score matching to more closely match the treatment and control groups of countries and re-estimate the difference-in-difference specification. Finally, following Rajan and Zingales (1998), we identify credit supply effects using industry measures of external finance dependence interacted with the CB coverage variable.
We find a strong positive and robust relationship between access to finance and job growth. Firms with access to a loan grow 1.16 percentage points faster than firms with no access to finance, controlling for firm fixed effects. This is economically significant given that the mean employment growth in our sample is 9.4%. The association between finance and job growth is stronger among MSMEs and SMEs than among large firms. MSMEs (SMEs) with access to a loan grow 1.27 (1.33) percentage points faster respectively than MSMEs (SMEs) without a loan, whereas we find no significant relation between access to finance and employment growth for large firms in our sample. These results are robust to using the introduction of CB as an exogenous shock to the supply of credit and also continue to hold in estimations with a matched sample. Also, effects are particularly large for MSME and SME firms in industries that are more dependent on external finance. These findings have implications for policy interventions targeted to produce job growth.