Do policy loans promote employment? Firm-level analysis

Governments establish policy banks to pro-actively manage their economies through policy loans to designated firms or firms in specific industries following government directives. The literature underexplores the impact of such policy-based financing on firm-level employment. Based on a manually collected firm-level policy loan data in China, we document that receiving a policy loan effectively promotes a firm’s employment. Specifically, when compared to firms that have not received a new policy loan , employee growth for firms with new policy loans is 4.15 percentage points higher (36.9% higher than an average firm). We also find the employment effect of policy loans is more salient for state-owned firms, for firms in regions with high unemployment rates, and during periods of great external shocks. The transmission mechanisms include lower financing costs, the easing of financial constraints, and greater corporate investment. Finally, we find that the effects of policy loans on employment last approximately three years, policy loans are more beneficial to highly skilled employees, and policy loans do not lead to excess employment. Overall, we provide a new perspective for the positive role of policy-based financing on employment.