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.