Can Paying Firms Quicker Affect Aggregate Employment?

by Jean-Noel Barrot and Ramana Nanda

Overview — In 2011, the United States federal government accelerated payments by 15 days to a subset of small-business government contractors. This study shows that, on average, each accelerated dollar of sales led to an almost 10 cent increase in payroll, with two-thirds of the increase coming from new hires and the remainder from increased earnings per worker. These findings highlight a new channel through which financial frictions affect firm-level employment.

Author Abstract

In 2011, the federal government accelerated payments to their small business contractors, spanning virtually every county and industry in the United States. We study the impact of this reform on county-sector employment growth over the subsequent three years. Despite firms being paid just 15 days sooner, we find payroll increased 10 cents for each accelerated dollar, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings. Importantly, however, we document substantial crowding out of non-treated firms employment, particularly in counties with low rates of unemployment. Our results highlight an important channel through which financing constraints can be alleviated for small firms, but also emphasize the general-equilibrium effects of large-scale interventions, which can lead to a substantially lower net impact on aggregate outcomes.

Paper Information