The Real Impact of Bank Deregulation

How does bank deregulation that increases bank competition affect employment? Hamid Boustanifar, researcher at the Stockholm School of Economics, is finding the answer in his new dissertation.

In theory, the easier access to credit that follows increased bank competition has ambiguous effects on the employment decisions of firms. On the one hand, easing financing constraints may allow firms to optimally substitute capital for labor by investing in more capital-intensive technologies, and thereby decrease employment. On the other hand, due to complementariness between labor and capital, the demand for labor and thus employment goes up when firms invest more. Therefore, whether bank deregulation increases or decreases employment is an empirical question.

“I address this question by exploiting the simultaneous existence of cross-sectional variation and variation over-time in individual states' deregulation of banks in the US as a quasi-natural experiment”, says Hamid Boustanifar.

The paper documents a strong impact of bank deregulation on employment growth. Furthermore, 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.

“I also investigate the channels between credit-market and employment outcomes. While bank deregulation did not affect the rate of entry and exit of firms, the job-creation rate of firms increased significantly following deregulation, suggesting that credit constraints act as a barrier to employment”, says Hamid Boustanifar.

The results of this paper make significant contributions to the empirical research on the real impact of financial reforms. The results are also of interest for policymakers since the study suggests that restricting the activities of banks geographically has detrimental effects on employment growth in an economy.

For more information, please contact:
Hamid Boustanifar, hamid.boustanifar@hhs.se,  +46-762 17 5818