Labor Market Effects of Public Bank Guarantees
Final Report Abstract
Our research sheds light on the labor market effects of public bank guarantees, a widely used policy tool aimed at stabilizing financial systems and supporting businesses. Understanding the implications of such guarantees on employment and wage dynamics is crucial for policymakers, economists, and the general public alike. Governments often introduce bank guarantees, arguing they serve the public interest by ensuring the stability of the financial system. However, public guarantees may also have significant effects on the labor market and on employment patterns of the borrowers of guaranteed banks. In this project, we empirically investigate these effects from different angles. We examine the impact of public bank guarantees on both employment likelihood and wages among employees in Germany. Our investigation draws on the integration of two datasets: we merge proprietary loan information data of public banks’ customers with the anonymous version of the Sample of Integrated Labor Market Biographies (SIAB) hosted by the Institute for Employment Research of the German Federal Employment Agency (IAB). To establish causality, we leverage the natural experiment presented by the elimination of public bank guarantees in 2001. Our findings indicate that bank guarantees diminish the overall wage prospects for employees who have worked in firms borrowing from banks subject to government guarantees. This is mainly driven by an increased likelihood of non-employment. For wages, we observe a slight increase in firms that borrow from banks with public guarantees. These results challenge the notion that employees derive benefits from public bank guarantees. Instead, they suggest a complex interplay between financial mechanisms and labor market dynamics. In the second paper, we investigate how improved capital allocation induced by the removal of public bank guarantees affects labor allocation in productive and unproductive establishments. The removal serves as a natural experiment that identifies the impact of capital allocation on workforce composition. In order to test the effect, we construct a data set that links an establishment-level micro administrative data set on labor market outcomes from the IAB with a proprietary bank-firm data set. It includes a 50% sample of German establishments with employees. Our findings show that establishments heavily reliant on guaranteed institutions experience a negative impact on the share of skilled workers and the wage premium. Furthermore, unproductive establishments suffer more pronounced effects compared to productive ones. The results suggest that the capital reallocation induced by the removal could improve the efficiency of reallocating skilled workers across establishments.
Publications
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"Do Public Bank Guarantees Affect Labor Market Outcomes? Evidence from Individual Employment and Wages", IWH Discussion Paper, 7, 2024
Baessler, L., Gebhardt, G., Gropp, R., Guettler, A. & Taskin, A.
