Banking on Snow: Bank Capital, Risk, and Employment

This paper analyzes how small-firm employment responds to labor productivity risk. We use highly granular data about firms employing workers whose productivity depends on the weather. This allows us to analyze the effects of exogenous fluctuations in labor productivity risk, induced by weather risk. We find that the risk reduces the firms' employment, with a stronger effect on the firms in locations where the regional banks have relatively little equity capital. We also find that, in these locations, the banks' borrowers receive less liquidity from their banks if the locations are subject to adverse weather shocks. It appears that bank capitalization affects small firms' capacity to take labor productivit risk by changing their access to liquidity "insurance". Well-capitalized banks support economic adaptation to weather-induced labor productivity risk.