This article takes advantage of access to confidential matched bank-firm data relative to the Belgian economy to investigate whether and how employment decisions of small- and medium-sized enterprises (SMEs) have been affected by credit constraints in the wake of the Great Recession. Variability in banks' financial health following the Great Recession is used as an exogenous determinant of firms' access to credit. Two-stage least squares and bivariate probit estimates suggest that SMEs borrowing money from pre-crisis less healthy banks were significantly more likely to be affected by a credit constraint and, in turn, to adjust their labour input downwards than pre-crisis clients of more healthy banks. More precisely, estimates show that credit-constrained SMEs were ceteris paribus between 40 and 65% more likely to reduce their workforce than their counterparts not facing such constraints. Yet, findings also indicate that employment consequences of credit shortages depend heavily on the environment in which SMEs operate. Results indeed indicate that credit constraints have been essentially detrimental for employment among SMEs experiencing a negative demand shock or facing severe product market competition. Finally, in terms of adjustment channels, results show that credit-constrained SMEs adjusted their workforce significantly more at the extensive margin (through individual layoffs, reduction of temporary employment and early retirement) than their non-constrained counterparts, but also that they relied more intensively on temporary layoff schemes (for economic reasons).
banks' financial health credit constraints employment Great Recession matchedbank-firm data Belgium Wage Dynamics Network (WDN)