Working Paper: NBER ID: w22396
Authors: Xavier Giroud; Holger M. Mueller
Abstract: Local labor market shocks are difficult to insure against. Using confidential micro data from the U.S. Census Bureau’s Longitudinal Business Database, we document that firms redistribute the employment impacts of local demand shocks across regions through their internal networks of establishments. During the Great Recession, the massive decline in house prices caused a sharp drop in consumer demand, leading to large employment losses in the non-tradable sector. Consistent with firms smoothing out the impacts of these shocks across regions, we find large elasticities of non-tradable establishment-level employment with respect to house prices in other counties in which the firm has establishments. At the same time, establishments of firms with larger regional networks exhibit lower employment elasticities with respect to local house prices in the establishment’s own county. To account for general equilibrium adjustments, we aggregate non-tradable employment at the county level. Similar to what we found at the establishment level, we find that non-tradable county-level employment responds strongly to local demand shocks in other counties linked through firms’ internal networks. These results are not driven by direct demand spillovers from nearby counties, common shocks to house prices, or local demand shocks affecting non-tradable employment in distant counties indirectly via the trade channel. Our results suggest that firms play an important role in the extent to which local labor market risks are shared across regions.
Keywords: labor market shocks; internal networks; employment; redistribution; demand shocks
JEL Codes: E24; E32; G31; J23; J63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local demand shocks (R22) | nontradable employment (J68) |
| local house prices in other counties (R31) | nontradable employment (J68) |
| house prices (R31) | employment elasticities (J60) |
| financial constraints (H60) | employment elasticities (J60) |
| firm networks (L14) | redistribution of employment impacts (J68) |