Firm Leverage and Unemployment during the Great Recession

Xavier Giroud and Holger M. Mueller

No 21076, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 to the Great Recession (“highleverage 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 show 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.

JEL-codes: E24 E32 R3 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-mac
Note: CF EFG LS
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Citations: View citations in EconPapers (46)

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