Bank Concentration and Local Labor Markets

Abstract

I use a quasi-experimental design supplied by bank anti-trust policy to inspect how bank concentration impacts local labor market outcomes. The regulator applies a cutoff rule when dealing with bank mergers such that markets directly below this regulatory cutoff see an increase in bank concentration, while ones directly above this cutoff do not. Markets that are just below the cutoff see an increase in their deposit-HHI as well as a decrease in their small business lending. A rise in county-level deposit-HHI of 142 points leads to a rise in the county's unemployment rate of 0.284 percentage points, a decline in employment of 0.5 percent, and a decline in average wages of 1 percent. The decline in employment is concentrated in tradable and bank dependent industries, suggesting that the employment effect is due to lower small business lending by banks. These employment effects are also concentrated in black neighborhoods, which also see a larger small business lending and entrepreneurship declines relative to other areas in the markets that receive the positive concentration shock. This paper is the first to show that local labor market conditions respond to changes in local bank concentration, and also that lower small business lending and entrepreneurship in black areas lead to disproportionately larger negative employment effects for these areas.