Credit Cycles, Firms, and the Labor Market

We use administrative data from the U.S. Census Bureau to estimate the causal effects of loose credit conditions on firm employment and worker earnings. To obtain quasi-random variation in firms’ exposure to credit booms, we exploit the segmentation of high-yield (BB+ rated) versus investment grade (BBB- rated) firms in credit markets. Loose credit conditions generate cyclical fluctuations in employment: high-default risk firms create jobs during the credit boom, but then experience financial distress and destroy these jobs during the ensuing bust. We show that these firm-level boom-bust dynamics are transmitted to individual workers. To obtain quasi-random variation in workers’ exposure to boom-induced job creation, we exploit the importance of parental connections in determining where labor market entrants are first employed. We find that recent high-school graduates with parents at high-yield (BB+) firms can more easily find high-paying jobs during credit booms, compared to graduates with parents at investment-grade (BBB-) firms. But ten years later, graduates whose parents were at BB+ firms have substantially lower earnings. The magnitude of these negative long-term effects is comparable to the effect of entering the labor market during a recession. Our results suggest that loose credit market conditions lead firms to create short-lived jobs that impede workers’ long-run accumulation of human capital.