Credit booms, labor reallocation, and productivity growth

We investigate how credit expansion affects labor reallocation and labor productivity growth in a sample of over 20 advanced economies between 1979 and 2009. Using industry-level data, we decompose aggregate labor productivity growth for each country into a common and an allocation component. We then run country fixed-effects panel regressions to examine how credit expansion influences each of these components. Next, we run industry-level regressions to examine how the sensitivity of employment growth to labor productivity growth varies with the intensity of credit expansion. Both analyses lead to the conclusion that credit growth tends to reduce aggregate labor productivity growth. The evidence also suggests that during credit booms this reduction occurs through labor reallocations toward lower productivity growth sectors.