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 random variation in which firms experience reduced credit spreads during booms, we exploit the segmentation of high-yield (BB+ rated) versus investment grade (BBB- rated) firms in credit markets. Loose credit conditions causally generate a boom-bust cycle in employment: high-default risk firms initially engage in significant job creation, but then experience financial distress and destroy these jobs over the next five years. We show that these boom-bust dynamics are transmitted to workers. To obtain random variation in which workers take the jobs created during booms, we exploit the importance of parental connections in determining where labor market entrants first work. 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 with BB+ parents have substantially lower relative earnings. The magnitude of these negative long-term effects is comparable to the effect of entering the labor market during a recession. Overall, our results suggest that loose credit market conditions cause firms to create short-lived jobs that expose workers to aggregate downturns and impede their accumulation of human capital.