Research Highlights

Dynamic Responses to Labor Demand Shocks

In 1978, the Supreme Court of the United States ruled that, no matter which state their customers resided in, banks could charge the highest interest rate allowed in the state in which they were headquartered. The Marquette decision led states to eliminate existing usury laws in an attempt to attract banks and their highly paid employees. One of the earliest states to eliminate its usury law was Delaware, which, as a result, became an important hub for financial services in the U.S.

In a new Upjohn Institute working paper, Russell Weinstein analyzes this important shock to local labor demand in Delaware’s financial sector and finds significant effects on employment growth, the unemployment rate, and labor force participation. He tracks the impacts of the shock at 10 and 20 years after Delaware eliminated its usury law and notes that the competitive advantage for attracting financial sector jobs weakened over time. Weinstein also observes how the spillover effects differ between the tradable and nontradable sectors.

In summary, Weinstein says, “The implication for policymakers is that short-run effects from attracting firms can be sustained if the policy shifts the economic composition toward a low-unemployment and high-wage sector in the long run. However, at least in this setting, the successful local policy appears inefficient at the aggregate level. Agglomerate effects do not appear stronger than in the industry nationally.”

Download Dynamic Responses to Labor Demand Shocks: Evidence from the Financial Industry in Delaware, by Russell Weinstein