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Summary:

Small and medium-sized enterprises (SMEs) made outsized contributions to net employment growth during the pandemic recession and recovery. However, credit conditions have tightened significantly during the past year and might hinder growth for small firms going forward. Using data on bank lending to small businesses and employment growth, we estimate that a tightening in bank credit supply of 1 percentage point is associated with an 11 percent decline in SMEs' net job creation rate. This estimate indicates that a bank credit tightening about one-third the size of the tightening observed during the Great Recession would reduce overall net job creation by approximately 285,000 jobs between March 2023 and March 2024.

Key findings:

1. SMEs made outsized contributions to net employment growth during the pandemic recession and recovery (March 2020–March 2022).
2. Much of this contribution came from small firms with fewer than 50 employees.
3. During the period 2007–12, we estimate that a tightening in bank credit supply of 1 percentage point leads to an 11 percent decline in the net job creation rate of SMEs.
4. Our estimates indicate that if current bank credit tightening were a third of what was observed during the Great Recession, then 285,000 jobs in SMEs would be at risk between March 2023 and March 2024.

Center Affiliation: Center for Financial Innovation and Stability

JEL classification: E24, E3, G21, J2, L2

Key words: small and medium-sized enterprises, employment, credit supply, bank lending

https://doi.org/10.29338/ph2023-5