Financial Development, Labor Markets, and Aggregate Productivity: Evidence from Brazil

Julia Fonseca Duarte, Bernardus Van Doornik

Research output: Working paper

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, leading to an expansion in 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 earnings, 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 2000's.
Original languageEnglish (US)
Number of pages60
StateUnpublished - Jan 11 2019
Externally publishedYes

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