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:	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.