Bank Competition and Local Labor Markets

While the real effects of bank competition is a classic topic in the finance literature, there has been relatively little research studying the effect it might have on local labor markets. In this paper, I utilize county level data and an exogenous shock to competition supplied by DOJ antitrust policies to look at the relationship between bank competition and local labor markets. Following this negative shock to competition, unemployment increases and wages decrease, but there is no aggregate employment effect. Industries that depend more on bank funding see an increase in employment following a negative shock to competition in the short run, but see a decrease in employment in the longer term. This is due to local banks taking a lower return on their loan portfolio to local businesses in the short run, while raising their loan rates in the long term. Once the type of industries present inside a county is taken into account, an employment effect can be documented in the aggregate. Overall, the evidence suggest that competition has a negative effect on employment outcomes, although there may be positive effects in the short run.