Abstract
Theory offers competing hypotheses about how the cost and availability of finance influence labor market outcomes. Exploiting the U.S. banking deregulation as a quasi-natural experiment, this paper studies the impact of credit market frictions on employment and wages outcomes. While the growth of wages was unaffected, the paper documents a strong impact of bank deregulation on employment growth. The growth of employment comes from industries that are relatively more dependent on external sources of finance, suggesting that the effect is indeed the result of changes in banks' performance. Potential channels between credit market and employment outcomes are also investigated. While branch deregulation did not affect the rate of entry and exit of firms, job creation rate of firms increases significantly following deregulation, suggesting that credit constraints act as a barrier to employment. Furthermore, increased employment cannot be fully accounted by changes in investment, which is consistent with the idea that labor, similar to capital, needs to be financed.