Credit Constraints and Labor Supply: Evidence from Bank Branching Deregulation
This paper examines labor supply adjustment‐both at the intensive and extensive margins‐following financial market development. Specifically, we exploit the staggered passage of bank branching deregulation in the United State to study the impact of relaxing credit constraints on labor supply decisions. We find strong evidence that improvements in how credit markets function decrease weekly hours worked, and that the effect is most significant for the lower‐middle (marginal) income group. Furthermore, we observe heterogeneous responses across demographic groups (race and income). In contrast, we find little to no evidence that deregulation has a significant impact on the extensive margin of participation.