Working Paper: NBER ID: w17830
Authors: Atif R. Mian; Amir Sufi
Abstract: A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector are distributed uniformly across all counties. We find exactly this pattern from 2007 to 2009. Alternative hypotheses for job losses based on uncertainty shocks or structural unemployment related to construction do not explain our results. Using the relation between non-tradable sector job losses and demand shocks and assuming Cobb-Douglas preferences over tradable and non-tradable goods, we quantify the effect of aggregate demand channel on total employment. Our estimates suggest that the decline in aggregate demand driven by household balance sheet shocks accounts for almost 4 million of the lost jobs from 2007 to 2009, or 65% of the lost jobs in our data.
Keywords: unemployment; aggregate demand; household balance sheets; employment losses
JEL Codes: E2; E32; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Drop in aggregate demand (E00) | Job losses (J63) |
| Negative consumer demand shock in high-leverage counties (D12) | Greater job losses in nontradable sector (F66) |
| Household leverage (G51) | Job losses in nontradable sector (F66) |
| Household leverage (G51) | Job losses in tradable sector (F66) |
| Demand shocks (E39) | Job losses in nontradable industries (F66) |