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FL-3: Credit Markets and Human Capital
Credit Supply Shocks and Labor Outcomes: Evidence from a Change in the Accounting Norms of Bank Pension Plans
1Swiss Finance Institute; 2University of Toronto; 3Banco de Portugal
This paper investigates how firm financing constraints heterogeneously impact workers and job flows. To do so, we employ an exogenous credit supply shock triggered by a change in accounting standards. In 2005, the introduction of new reporting norms for defined-benefit pension plans in Portugal led to large increases in the accounting value of pension liabilities. Affected banks increased both the direct contributions to their pension plans and made provisions from Tier 1 capital. They subsequently reduced the supply of credit. We combine this credit supply shock with a bank-firm-employee matched dataset that covers the whole Portuguese economy. We document, first, that firms in a relationship with affected banks do not perfectly substitute credit and hence borrow less. Second, this adverse credit supply shock translates into a decrease in firm employment. At the worker level, the effect is stronger at the two extremes of the skill distribution: both the more educated workers, or those occupying more skill-intensive jobs, and the less educated ones, or those occupying unskilled jobs, are more likely to leave affected firms. These results have implications for worker inequality and the allocation of talent.
Debt and Human Capital: Evidence from Student Loans
1Boston College; 2NYU Stern School of Business
This paper investigates the dynamic relation between debt and investments in human capital. We document a negative causal effect of the level of undergraduate student debt on the probability of enrolling in a graduate degree for a random sample of the universe of federal student loan borrowers in the US. We compare students (i) within school and cohort, and (ii) across cohorts within the same school at the time of a large tuition change. The latter strategy exploits the fact that students who face a tuition increase in earlier grades end up with significantly more debt than students who face the same tuition increase in later grades. We find that $4,000 in higher debt causes a two percentage point reduction in the probability of enrolling in graduate school relative to a mean of 12%. Further results suggest this effect is largely driven by credit constraints, is monotonically weaker with family income, and is attenuated for students who had compulsory personal finance training in high school. The results highlight an important trade off associated with debt-financing of human capital, and inform the debate on the effects of the large and increasing stock of student debt in the US.
The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets
1Federal Reserve Bank of Cleveland; 2University of Texas at Austin
Lenders have traditionally used credit reports to measure a borrower’s default risk, but credit agencies also market reports to employers for use in hiring. Since the onset of the Great Recession, eleven state legislatures have restricted the use of credit reports in the labor market. We document that county-level unemployment rose faster in states that restricted employer credit checks and counties with more sub-prime citizens experienced larger increases in the unemployment rate than average. Using data from individual credit reports, we find that access to credit declines and delinquencies increase significantly after the state-level policy changes, especially for subprime borrowers.
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