Description:

Speaker: Sean Higgins

Title: Persistent Employment Effects of Easing Liquidity Constraints during a Temporary Shock

Abstract: Economic shocks coupled with contractions in credit supply cause firms to fire workers and explain a substantial portion of unemployment during crises. Does easing liquidity constraints during such shocks prevent firms from firing workers, and does liquidity have a persistent effect on employment even after the temporary shock has ended? In collaboration with a commercial bank in Chile, we conducted a randomized controlled trial in which half of 10,072 eligible firms were randomly approved for credit.  Using employer-employee data, we track effects on employment four years after treatment. When faced with a shock from their municipality going into lockdown, control firms fire employees while treatment firms do not, resulting in an intent-to-treat effect of 0.27 additional employees per treated firm over the first year after treatment, compared to a control mean of 4.4 employees. This effect persists for several months after the shock ends (i.e., after firms permanently exit lockdown). In survey data, treatment causes a 22% increase in sales and 27% increase in profits.