The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity

Using a difference-in-difference methodology, we find that the state-level banking deregulation of local U.S. credit markets leads to significant increases in the reallocation of labor within local industries towards firms with higher marginal products of labor. Using firm production functions estimated with plant-level data, we propose and examine an approach that quantifies the industry productivity gains from labor reallocation and find that these gains are economically important. Our analysis suggests that labor reallocation is a significant channel through which credit market conditions affect the aggregate productivity and performance of local industries.