Top

Empirical Economics

Published in:

20-04-2021

Indirect and direct effects of the subprime crisis on the real sector: labor market migration

Authors: Thiago Christiano Silva, Fabiano José Muniz, Benjamin Miranda Tabak

Published in: Empirical Economics | Issue 3/2022

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

The bursting of the US housing bubble in the second half of 2008 triggered an almost unprecedented systemic crisis in the world economy. The financial collapse quickly overflowed into the real economy and caused, among other effects, a sharp fall in the flow of world trade. Using export data from Brazilian municipalities, we show that the subprime crisis had a more significant effect on production and employment in exporting cities than municipalities more devoted to the domestic economy. We find that the manufacturing and construction sectors of exporting cities were the most affected during the crisis. However, exporting municipalities with a substantial share of services activities were more resilient to the external crisis. This difference is significant and sheds light on the debate on the effects of the crisis on Brazilian regions and cities. Using a unique business management dataset that contains firm-to-firm controls, we also find spillovers in the labor market from exporting to domestic-oriented cities through job reallocation. Our results suggest that workers migrate from exporting municipalities to other non-exporting municipalities within the same firm economic group.

previous article Corporate boards, interorganizational ties and profitability: the case of Japan

next article The effects of parental involvement in homework: two randomised controlled trials in financial education

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

In the dataset, we have information on the number of firms controlled in a specific municipality A by firms in another municipality B. The collection of all pairs \(\langle A, B \rangle \) gives rise to a complex network of business management flows.

Subprime-rated customers were also known as NINJAS, an acronym for non-income, equity, and asset-free customers.

At the time, a possible detachment between the advanced and emerging economies was being discussed. This thesis gained notoriety from the 1990s when the per capita GDP of emerging economies grew at faster rates than advanced economies, which may have represented a change in global dynamics. However, this thesis was not confirmed, and there was a severe contraction of economies during this period.

During this period, world GDP fell sharply, but the recession was not contained only in this period. According to the NBER, for example, the recession in the US economy lasted 18 months. On the other hand, the Brazilian economy’s reaction power was faster, with only six months of recession as determined by the FGV’s Economic Cycling Dating Committee (CODACE).

If we focus on the municipalities that had some relationship with the foreign sector, 70.6 % of exporting municipalities reduced the volume traded, and 13.8% of these paralyzed transactions during the years 2008–2009. From a regional point of view, 25% of the municipalities that stopped exporting in 2009 are in the Northeast, suggesting that the impact was significant. In the Midwest, only 19 municipalities stopped exporting, which shows the greater resilience of this region, primarily due to agribusiness expansion.

However, this advantage would not manifest itself in municipalities with low productive potential and little economic diversification.

By removing these municipalities, we are effectively mitigating the concern that production could be exported not only through the municipality which effectively produced but by one that contains a port or an airport.

For large firms, the effect of the crisis was more on the profit margin, and there was also a reduction in the number of products in the export basket. For small firms, the impact was on decreasing the number of destinations and, in some cases, export paralysis.

At the height of the crisis, the monetary authority created a new mechanism for offering foreign currency loans backed by sovereign bonds or export foreign exchange to finance exports.

The subsectors are agriculture, industry, and services.

Comex Stat: http://comexstat.mdic.gov.br.

International Merchandise Trade Statistics, IMTS 2010.

The harmonized international classification system for goods established in 1998.

Here, we can cite financial intermediation services and engineering consultancy services, for example. New technologies have also induced firms to become more decentralized as demand for specialized outsourced services increases.

Agribusiness growth is usually accompanied by other complementary activities such as food industry, leather processing industry, and sugar and alcohol industry, for example.

We divide total exports by the GDP to remove size effects. In addition, we gain an important economic insight: The ratio provides information on the municipality’s economic dependency on foreign demand relative to its overall economic activities (domestic + foreign).

São Paulo (SP), Angra dos Reis (RJ), São José dos Campos (SP), Parauapebas (PA), Paranaguá (PR), Santos (SP), Rio de Janeiro (RJ), Itabira (MG), São Bernardo do Campo (SP) and Macaé (RJ).

During the 2008–2009 biennium, the total volume exported from Parauapebas (PA) to China increased by almost 130%.

Ouro Preto (MG), Itabira (MG), and Angra dos Reis (RJ).

It is noteworthy that there is a tendency to reduce the participation of manufactured goods in the export agenda after 2008, notably directed to advanced economies. Despite being a worldwide movement, the decline in exports of products with higher added value was more intense in Brazil than other economies.

Chile, Italy, and Russia.

Cempre constitutes a collection of datasets on the country’s economic activity, gathering managerial and economic information from annual surveys in the areas of Industry, Construction, Trade, and Services, carried out by the IBGE, as well as from the Relationship Annual Social Information—RAIS, Ministry of Labor and Employment.

Though Osaco is not a capital in Brazil, it is located in the Greater São Paulo area. Data from Econodata suggest that there are more than 65,000 firms in Osasco (https://www.econodata.com.br/lista-empresas-brasil), giving a large potentiality of firm-to-firm control across different municipalities as suggested by the depicted network in Fig. 3.

Eichengreen et al. (2012) show how the crisis went global and ended up in a global recession, affecting several countries, including Brazil. In quantitative terms, Dufrénot et al. (2011) show that the decrease in Brazil’s GDP growth was substantial in 2009, compared to 2007 and 2008.

We also perform a series of robustness tests to further validate our identification strategy. For instance, we rerun our econometric specifications only with municipalities with nonzero exporting profiles before the crisis to alleviate further concerns about fundamental differences among municipalities in the treatment and control groups.

We do not add the marginal regressors \(\text {Post}_t\) nor \(\text {Crisis Exposure}_{i}\) because they are collinear with the municipality and dynamic time fixed effects, respectively.

If exporting municipalities could perfectly replace foreign customers for new domestic customers, we would not observe any economic nor financial effects. However, the establishment of customers during stressful times is relatively harder due to economic and financial frictions. During stressed periods, there is an increase in informational asymmetries and in making business. One example is in the banking industry. Since banks have information on their existing customers before the onset of a crisis, their credit supply is less affected than those of new customers that arrive during the crisis. Such phenomenon is known as relationship lending (Kobayashi and Takaguchi 2018; Beatriz et al. 2018 and Durguner (2017)). In any case, if there is some level of substitution, then our estimates would be biased downwards to the true effect of the global financial crisis. Our short-term analysis somewhat alleviates such concern.

Part of the resilience of the manufacturing and construction sectors in exporting cities more reliant on non-tradable activities (high services share) is associated with countercyclical measures taken by the Brazilian government to address the crisis. Temporary tax cuts for industry, credit subsidies, interest rate cuts, and regulated price reductions were some of the fiscal and monetary decisions that help drive aggregate demand and support service activities.

To compute the HHI, we take the sum of squared shares of the five economic sectors discussed before (manufacturing, construction, trade, services, and farming). Larger HHI values indicate more concentration of job activities in the same economic sector (specialization), and lower HHI values indicate greater job diversification over different economic sectors.

Workers can only withdraw their FGTS in specific circumstances, such as in the event of being fired.

We remove municipalities in the upper median of the distribution because the direct effect—i.e., being directly exposed to foreign demand—is more pronounced than any indirect domestic effect.

This becomes evident when we compare the geographical maps of the direct and indirect effects in Figs. 2 and 4, respectively. While the former has the existence of isolated municipalities preponderantly, the latter has several affected municipalities nearby. The existence of geographically isolated municipalities does not allow us to make within-mesoregion comparisons to analyze the direct effects of the crisis.

An alternative explanation is that firms could reduce the number of employees in exporting municipalities and hire in non-exporting municipalities. However, if this would be the case, there would be no reason to observe an increase in the workforce of non-exporting connected to exporting municipalities.

The \(\beta \) coefficients are relative to the year 2006. If the horizontal bars cross the zero mark, then the treatment and control groups’ trends are statistically similar to that of 2006.

We also provide parallel trends check for other outcomes employed in this paper as robustness tests.

Acemoglu D, Carvalho VM, Ozdaglar A, Tahbaz-Salehi A (2012) The network origins of aggregate fluctuations. Econometrica 80(5):1977–2016CrossRef

Amiti M, Weinstein DE (2011) Exports and financial shocks. Q J Econ 126(4):1841–1877CrossRef

Ariu A (2016) Crisis-proof services: Why trade in services did not suffer during the 2008–2009 collapse. J Int Econ 98:138–149CrossRef

Atalay E (2017) How important are sectoral shocks? Am Econ J Macroecon 9(4):254–80CrossRef

Beatriz M, Coffinet J, Nicolas T (2018) Relationship lending and SMEs’ funding costs over the cycle: why diversification of borrowing matters. J Bank Finance:105471

Behrens K, Corcos G, Mion G (2013) Trade crisis? What trade crisis? Rev Econ Stat 95(2):702–709CrossRef

Berkmen SP, Gelos G, Rennhack R, Walsh JP (2012) The global financial crisis: explaining cross-country differences in the output impact. J Int Money Finance 31(1):42–59CrossRef

Blanchard OJ, Das M, Faruqee H (2010) The initial impact of the crisis on emerging market countries. Brook Pap Econ Act 41(1):263–323CrossRef

Boehm CE, Flaaen A, Pandalai-Nayar N (2019) Input linkages and the transmission of shocks: firm-level evidence from the 2011 Tōhoku earthquake. Rev Econ Stat 101(1):60–75CrossRef

Bonomo M, Brito RD, Martins B (2015) The after crisis government-driven credit expansion in Brazil: a firm level analysis. J Int Money Finance 55:111–134CrossRef

Borchert I, Mattoo A (2009) The crisis-resilience of services trade. The World Bank

Bricongne JC, Fontagné L, Gaulier G, Taglioni D, Vicard V (2012) Firms and the global crisis: French exports in the turmoil. J Int Econ 87(1):134–146CrossRef

Chor D, Manova K (2012) Off the cliff and back? Credit conditions and international trade during the global financial crisis. J Int Econ 87(1):117–133CrossRef

Coleman N, Feler L (2015) Bank ownership, lending, and local economic performance during the 2008–2009 financial crisis. J Monet Econ 71:50–66CrossRef

Cortes GS, Silva TC, Doornik BFNV (2019) Credit shock propagation in firm networks: evidence from government bank credit expansions. Central Bank of Brazil, Research Department, Working Papers Series 507

Dooley M, Hutchison M (2009) Transmission of the U.S. subprime crisis to emerging markets: evidence on the decoupling–recoupling hypothesis. J Int Money Finance 28(8):1331–1349CrossRef

Dufrénot G, Mignon V, Péguin-Feissolle A (2011) The effects of the subprime crisis on the Latin American financial markets: an empirical assessment. Econ Model 28(5):2342–2357CrossRef

Durguner S (2017) Do borrower-lender relationships still matter for small business loans? J Int Financ Mark Inst Money 50:98–118CrossRef

Eichengreen B, Mody A, Nedeljkovic M, Sarno L (2012) How the subprime crisis went global: evidence from bank credit default swap spreads. J Int Money Finance 31(5):1299–1318CrossRef

Feldkircher M (2014) The determinants of vulnerability to the global financial crisis 2008 to 2009: credit growth and other sources of risk. J Int Money Finance 43:19–49CrossRef

Kobayashi T, Takaguchi T (2018) Identifying relationship lending in the interbank market: a network approach. J Bank Finance 97:20–36CrossRef

Levchenko AA, Lewis LT, Tesar LL (2010) The collapse of international trade during the 2008–09 crisis: in search of the smoking gun. IMF Econ Rev 58(2):214–253CrossRef

Martin P, Rey H (2006) Globalization and emerging markets: With or without crash? Am Econ Rev 96(5):1631–1651CrossRef

Pentecôte JS, Rondeau F (2015) Trade spillovers on output growth during the 2008 financial crisis. Int Econ 143:36–47CrossRef

Petersen MA (2009) Estimating standard errors in finance panel data sets: comparing approaches. Rev Financ Stud 22(1):435–480CrossRef

Spatareanu M, Manole V, Kabiri A (2018) Exports and bank shocks: evidence from matched firm-bank data. Struct Change Econ Dyn 47:46–56CrossRef

Title: Indirect and direct effects of the subprime crisis on the real sector: labor market migration
Authors: Thiago Christiano Silva
Fabiano José Muniz
Benjamin Miranda Tabak
Publication date: 20-04-2021
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 3/2022
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-021-02051-1

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Springer Professional "Wirtschaft+Technik"

Other articles of this Issue 3/2022

Addressing endogeneity when estimating stochastic ray production frontiers: a Bayesian approach

Testing for the rationality of central bank interest rate forecasts

Corporate boards, interorganizational ties and profitability: the case of Japan

Time connectedness of fear

Uncertainty in an emerging market economy: evidence from Thailand

Local projection variance impulse response

Premium Partner