Employment declined substantially during the 2007–2009 recession, especially in small and young firms. Using confidential firm-level data of the universe of firms and a difference-in-differences methodology, this paper estimates that financial constraints reduced employment growth by 4 to 8 percentage points in small firms relative to large firms and by 7 to 9 percentage points in young relative to old firms. I find that the effect of financial constraints on small firms is driven to a large extent by young firms. I then document that financial constraints affected employment growth in small and young firms strongly through the entry and exit of firms.

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