When Employment Protection Became Bank Information

In Chile's COVID-19 response, the important distinction was not simply between firms that suffered and firms that did not. Some firms faced a financial risk that existed before the pandemic; others faced a sudden operating shock caused by falling sales or a lockdown; many faced both. This chapter examines how those conditions changed use of employment protection and guaranteed credit, and why employment-program participation could become information in a bank's decision. The result is a more precise way to understand how an alternative form of support can reduce borrowing needs while also making a lender more cautious.

Sales losses and lockdowns did not mean the same thing as credit risk

The earlier selection evidence used a pre-pandemic risk proxy to compare firms' repayment prospects. The next problem is to identify what the pandemic itself did to operations. A fall in sales is not automatically evidence that a firm was financially weak before COVID-19. It may be the consequence of a temporary mobility restriction, a collapse in customer demand, or the inability to deliver a service in person. The distinction matters because a policy that replaces lost operating income should respond to the shock's real effects, while a bank deciding whether to extend debt must also consider the chance of repayment.

The study's sales-growth comparisons point to different responses from the two programs. Firms with either positive or negative sales growth were about 19 percent more likely to use guaranteed credit than firms with little change in sales. In other words, credit take-up was broad across firms that were differently affected by the pandemic. A firm with falling sales could seek working capital to bridge the interruption, but a firm with rising sales could also want cheap liquidity to protect operations or take advantage of unusually favorable terms. Sales direction alone did not determine who used credit.

Employment protection had a different pattern. Its reported use was 11.2 percent among firms with negative sales growth and 5.3 percent among firms with positive sales growth. The reason follows from the program's opportunity cost. Freezing contracts or reducing hours meant giving up some current activity. That sacrifice was less costly when sales had already fallen and the firm could not profitably use all of its labor. A firm whose sales were holding up had more to lose from scaling down, so it had less reason to use the employment instrument even if it could technically qualify.

This is not a distinction between “needy” and “deserving” firms. It is a distinction between the type of constraint they faced. Guaranteed credit addresses a financing constraint: the firm wants to keep activity going but needs cash before revenue arrives. Employment protection addresses an operating constraint: the firm cannot use all of its labor productively for a time and needs a way to preserve the employment relationship without carrying the full cost of idle work.