Finance Seminar: Ramin Baghai, SSE

Presenter: Ramin Baghai, SSE

Title: Employee debt overhang and firm performance

Abstract: What are the consequences for firms when an employee experiences financial distress? We study wage garnishment, a debt-enforcement mechanism that seizes all earnings above a protected subsistence threshold. Exploiting quasi-random variation in the timing of enforcement, we find that garnished workers reduce labor supply, bunching earnings at the protected threshold: monthly earnings fall by 8%, unemployment and sickness absence rise, and promotions decline by 27%. Consistent with an incentive channel, effects are concentrated among workers whose debt is too large to repay realistically through garnishment. Coworkers absorb part of the workload, working longer hours. The added workload carries a health cost: coworkers' sick leave, hospital admissions, and prescriptions for anxiety and depression medication rise. Firms employing garnished workers experience persistent declines in value added and sales, and a large increase in exit probability; these effects are most visible among small firms where a single garnished worker represents a large share of productive capacity. To separate labor demand from supply effects, we examine a 2022 reform that raised protected thresholds without changing the information environment for employers: distorted work incentives, not stigma, drive these effects. Employee financial distress is, ultimately, a firm-level shock.

Host: Santanu Kundu

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