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Title: Redistribution of Local Demand Shocks through Firms' Internal Networks

Author(s): Xavier Giroud and Holger M Mueller

Publication Date: July 2016

Keyword(s):

Programme Area(s): Financial Economics, Labour Economics and Monetary Economics and Fluctuations

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 adverse employment impacts of local demand shocks across regions through their internal networks of establishments. We find large elasticities of non-tradable establishment-level employment with respect to house prices in other counties in which the firm has establishments. Consistent with theory, these elasticities increase with the extent of firms' financial constraints. Further, and consistent with the notion that firms smooth out the impacts of local demand shocks across regions, we find that establishments of firms with more expansive regional networks exhibit lower elasticities with respect to house prices in the establishment's own county. To account for general equilibrium adjustments, we also consider total 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 of establishments. These results are not driven by direct demand spillovers from nearby counties, common county-level shocks to house prices, or local demand shocks affecting non-tradable employment in distant counties indirectly through the trade channel. Overall, our results suggest that firms play an important role in the extent to which local labor market risks are shared across regions.

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Bibliographic Reference

Giroud, X and Mueller, H. 2016. 'Redistribution of Local Demand Shocks through Firms' Internal Networks'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11384