Credit Supply, Firms, and Earnings Inequality

Abstract

We study the distributional effects of a monetary policy-induced firm-level credit supply shock on individual wages and employment. To this end, we construct a novel dataset that links worker employment histories to firms' bank credit relationships in Germany. We document that firms in relationships with banks that were more exposed to negative monetary policy rates in 2014 see a relative reduction in credit supply. A negative credit supply shock in turn is associated with lower firm-level average wages and employment. These effects are concentrated among distinct worker groups within firms, with initially lower-paid workers more likely to be fired and initially higher-paid workers more likely to receive wage cuts. At the same time, wages decline by more at initially higher-paying firms. Consequently, wage inequality within and between firms decreases. Our results suggest that monetary policy has important distributional effects in the labor market.

Uncovering the Mechanism(S): Financial Constraints and Wages

“…Franklin et al ( 2020) make a similar observation for the UK. Complementary evidence to ours is provided by Moser et al (2020) who show that reduced credit supply leads to lower wage inequality as wages of previously higher-paying firms and workers fall relatively more. They find that a one standard deviation increase in exposure to a negative credit supply shock is associated with a significant reduction in mean wages of up to 1.3 percent.…”

“…Popov and Rocholl (2018 use regional variation in shocks to German savings banks during the financial crisis to show that average firm-level wages in Germany were reduced in response to negative credit shocks. Apart from our paper, only Moser et al (2020) apply a large administrative employer-employee panel-data. While we use balance-sheet information to measure the financial conditions of firms directly and over time, Moser et al (2020) explore the bank-level exposure to negative monetary policy rates in an event study for the year 2014 to address the effect of credit supply.…”

“…Apart from our paper, only Moser et al (2020) apply a large administrative employer-employee panel-data. While we use balance-sheet information to measure the financial conditions of firms directly and over time, Moser et al (2020) explore the bank-level exposure to negative monetary policy rates in an event study for the year 2014 to address the effect of credit supply. They focus on the effects of financial conditions on within and between firm wage inequality without taking into account specific financial channels or general equilibrium effects.…”

The real effects of banks' corporate credit supply: A literature review

“…Another interesting and open question is how firms' responses to credit supply shocks affect wage inequality and thus the (in)efficient allocation of human capital. Existing evidence on labor allocation is scarce (e.g., Bai et al, 2018; Barbosa et al, 2020; Berton et al, 2018; Moser et al, 2020), and leaves plenty of room for additional investigations.…”

How credit constraints affect small and medium enterprises' strategic employment decisions and employees' labour outcomes: Evidence from Vietnam1

“…This paper contributes to the recent literature examining the role that financial resources play in affecting firms' employment decisions by focusing on a developing country. While the existing literature is rich and expanding, it has mainly focused on developed countries (see, for example, Barbosa et al., 2020; Berton et al., 2018; Caggese & Cuñat, 2008; Caggese et al., 2019; Chodorow‐Reich, 2013; Moser et al., 2020). There is a much smaller number of papers studying the nexus between financing constraints and employment decisions in developing or transitional countries.…”