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Financial Development and Labor Markets: evidence from Brazil

Author

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  • Julia Fonseca
  • Bernardus Van Doornik
Abstract
We estimate the effect of an increase in the availability of bank credit on the employment and the earnings of high- and low-skilled workers. To do so, we consider a bankruptcy reform that increased the legal protections of secured creditors, which led to an expansion of bank credit to Brazilian firms. We use detailed administrative data and an empirical strategy that compares changes in outcomes for financially constrained firms, which were affected by the bankruptcy reform, with unconstrained firms, which were largely unaffected by the reform. Following the bankruptcy reform and subsequent expansion in credit, constrained firms increased employment, especially of high-skilled workers. We also observe an increase in wages, with gains concentrated on skilled workers and on workers who were employed at constrained firms prior to the reform. To rationalize these findings, we design a model in which heterogeneous producers face constraints in their ability to borrow and have production functions featuring capital-skill complementarity. Using this framework, we estimate that the reallocation of resources induced by the bankruptcy reform accounts for 36 percent of the observed increase in aggregate productivity in Brazil during the 2000s.

Suggested Citation

  • Julia Fonseca & Bernardus Van Doornik, 2020. "Financial Development and Labor Markets: evidence from Brazil," Working Papers Series 532, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:532
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps532.pdf
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    References listed on IDEAS

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    Cited by:

    1. Moser, Christian & Saidi, Farzad & Wirth, Benjamin & Wolter, Stefanie, 2020. "Credit Supply, Firms, and Earnings Inequality," MPRA Paper 100371, University Library of Munich, Germany.

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