DP10539 Firm Leverage and Unemployment during the Great Recession
|Author(s):||Xavier Giroud, Holger M Mueller|
|Publication Date:||April 2015|
|Keyword(s):||financial accelerator, firm balance sheet channel, leverage, unemployment|
|JEL(s):||E24, E32, G32, R3|
|Programme Areas:||International Macroeconomics, Labour Economics, Financial Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10539|
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 (“high-leverage 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 find 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.