Working Paper: NBER ID: w21076
Authors: Xavier Giroud; Holger M. Mueller
Abstract: We argue that firms’ balance sheets were instrumental in the propagation of shocks during the Great Recession. Using establishment-level data, we show that firms that tightened their debt capacity in the run-up to the Great Recession (“highleverage firms”) exhibit a significantly larger decline in employment in response to household demand shocks than firms that freed up debt capacity (“low-leverage firms”). In fact, all of the job losses associated with falling house prices during the Great Recession are concentrated among establishments of high-leverage firms. At the county level, we show that counties with a larger fraction of establishments belonging to high-leverage firms exhibit a significantly larger decline in employment in response to household demand shocks. Thus, firms’ balance sheets also matter for aggregate employment.
Keywords: Firm Leverage; Unemployment; Great Recession; Household Demand Shock
JEL Codes: E24; E32; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household demand shocks (D12) | Employment outcomes (J68) |
| High-leverage firms (G32) | Employment sensitivity to household demand shocks (J23) |
| Decline in house prices (R31) | Employment outcomes (J68) |
| High-leverage firms (G32) | Job losses during Great Recession (F66) |
| Counties with high fraction of high-leverage firms (R30) | Decline in employment (J63) |