Financial development and labor market outcomes: Evidence from Brazil

We estimate the effect of increased access to bank credit on the employment and wages of high-and low-skilled workers. To do so, we consider a bankruptcy reform that led to an expansion of bank credit to Brazilian firms. We use administrative data and exploit cross-sectional variation in the enforcement of the new legislation arising from differences in the congestion of civil courts. We find that the credit expansion led to an increase in the skill intensity of firms and in within-firm returns to skill and to a reallocation of skilled la -bor from financially unconstrained firms to constrained firms. To rationalize these findings, we design a model in which heterogeneous producers face constraints in their ability to borrow and have production functions featuring capital-skill complementarity. We use this framework to generate an industry-level measure of capital-skill complementarity, which we use to provide direct evidence that the effect of access to credit on skill utilization and the skill premium is driven by a relative complementarity between capital and skilled labor. (c) 2021 Elsevier B.V. All rights reserved.