You are here

Economics in a picture

Economics in a picture

A decline in bank credit can have persistent effects on the labor market


A decline in bank short-term credit can have persistent effects on the real economy, and in particular on the labor market. Acabbi, Panetti and Sforza (2019) find evidence in support of this observation in Portugal. In fact, the unexpected failure of Lehman Brothers and the resulting interbank market dry-up of 2008 led to a decline in bank short-term credit to the Portuguese corporate sector. This led Portuguese firms to reduce their workforce in the years that followed. The figure shows that, after normalizing to zero the effect on impact (which was already negative) of a 1-percent reduction in short-term credit in 2008, the effect in 2009-2013 was more negative, for about 0.08-0.18 percentage points.

Decomposing these effects between attached workers (i.e. those present in a firm for the whole period 2006-2008) on one side and less-attached workers (i.e. those present only in part of 2006-2008) and net hires (after 2008) on the other, one can see that this second group was hit the most. Essentially the whole aggregate effect on employment is explained by cuts in net hires and less-attached workers, while the effect on attached workers is small and not statistically different from zero. The presence of firing costs increasing with workers’ tenure, a dual labor market and firms’ willingness to retain more experienced workers and not lose their human capital are all possible explanations of this phenomenon.



For more details, see Acabbi, Panetti and Sforza (2019), “The Financial Channels of Labor Rigidities: Evidence from Portugal”, Banco de Portugal Working Paper No 2019-15. 

Prepared by Ettore Panetti and Leonor Queiró. The analyses, opinions and findings expressed above represent the views of the authors and are not necessarily those of Banco de Portugal or the Eurosystem.


If you want to receive an e-mail whenever a new “Economics in a picture” is published send your request to