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Firm Leverage, Consumer Demand, and Employment Losses during the Great Recession

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  • Xavier Giroud
  • Holger M. Mueller

Abstract

We argue that firms’ balance sheets were instrumental in the propagation of consumer demand shocks during the Great Recession. Using establishment-level data, we show that establishments of more highly levered firms exhibit a significantly larger decline in employment in response to a drop in consumer demand. These results are not driven by firms being less productive, having expanded too much prior to the Great Recession, or being generally more sensitive to fluctuations in either aggregate employment or house prices. At the county level, we find that counties with more highly levered firms experience significantly larger job losses in response to county-wide consumer demand shocks. Thus, firms’ balance sheets also matter for aggregate employment. Our research suggests a possible role for employment policies that target firms directly besides conventional stimulus.

Suggested Citation

  • Xavier Giroud & Holger M. Mueller, 2017. "Firm Leverage, Consumer Demand, and Employment Losses during the Great Recession," Working Papers 17-01, Center for Economic Studies, U.S. Census Bureau.
  • Handle: RePEc:cen:wpaper:17-01
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    References listed on IDEAS

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    Cited by:

    1. David P. Glancy, 2017. "Housing Bust, Bank Lending & Employment : Evidence from Multimarket Banks," Finance and Economics Discussion Series 2017-118, Board of Governors of the Federal Reserve System (US).
    2. Archawa Paweenawat & Thitima Chucherd & Nakarin Amarase, 2017. "Uncovering Productivity Puzzles in Thailand: Lessons from Microdata," PIER Discussion Papers 73, Puey Ungphakorn Institute for Economic Research, revised Oct 2017.
    3. Pierre Cahuc & Francis Kramarz & Sandra Nevoux, 2018. "When Short-Time Work Works," Sciences Po publications 2018-03, Sciences Po.
    4. Cahuc, Pierre & Carcillo, Stéphane & Le Barbanchon, Thomas, 2017. "The Effectiveness of Hiring Credits," IZA Discussion Papers 11248, Institute for the Study of Labor (IZA).
    5. Sudipto Karmakar & Francisco Buera, 2017. "Real Effects of Financial Distress: The Role of Heterogeneity," 2017 Meeting Papers 1356, Society for Economic Dynamics.
    6. Wix, Carlo, 2017. "The long-run real effects of banking crises: Firm-level investment dynamics and the role of wage rigidity," SAFE Working Paper Series 189, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    7. Giupponi, Giulia & Landais, Camille, 2018. "Subsidizing Labor Hoarding in Recessions: The Employment & Welfare Effects of Short Time Work," CEPR Discussion Papers 13310, C.E.P.R. Discussion Papers.
    8. Gregor Bäurle & Sarah M. Lein & Elizabeth Steiner, 2017. "Employment Adjustment and Financial Constraints - Evidence from Firm-level Data," Working Papers 2017-18, Swiss National Bank.
    9. Keiichiro Kobayashi & Daichi Shirai, 2017. "Debt-Ridden Borrowers and Economic Slowdown," CIGS Working Paper Series 17-002E, The Canon Institute for Global Studies.
    10. Holger M. Mueller & Constantine Yannelis, 2017. "Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs," NBER Working Papers 23284, National Bureau of Economic Research, Inc.
    11. Mueller, Holger M & Yannelis, Constantine, 2017. "Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs," CEPR Discussion Papers 11938, C.E.P.R. Discussion Papers.
    12. Pierre Cahuc & Stéphane Carcillo & Thomas Le Barbanchon, 2019. "The Effectiveness of Hiring Credits," Sciences Po publications info:hdl:2441/2rcfhie1t29, Sciences Po.
    13. Kalemli-Ozcan, Sebnem, 2018. "Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness," CEPR Discussion Papers 13337, C.E.P.R. Discussion Papers.
    14. Elena Crivellaro & Aikaterini Karadimitropoulou, 2019. "The role of financial constraints on labour share developments: macro- and micro-level evidence," Working Papers 257, Bank of Greece.
    15. Giupponi, Giulia & Landais, Camille, 2018. "Subsidizing labor hoarding in recessions: the employment and welfare effects of short time work," LSE Research Online Documents on Economics 91708, London School of Economics and Political Science, LSE Library.
    16. repec:eee:jfinec:v:131:y:2019:i:1:p:1-19 is not listed on IDEAS
    17. Kalemli-Ozcan, Sebnem, 2018. "Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis," CEPR Discussion Papers 13336, C.E.P.R. Discussion Papers.
    18. repec:eee:jfinec:v:125:y:2017:i:2:p:369-388 is not listed on IDEAS
    19. Giroud, Xavier & Mueller, Holger M, 2018. "Firm Leverage and Regional Business Cycles," CEPR Discussion Papers 13355, C.E.P.R. Discussion Papers.
    20. Kehoe, Patrick J. & Midrigan, Virgiliu & Pastorino, Elena, 2017. "On the Importance of Easing Consumer Credit Frictions," Economic Policy Paper 17-5, Federal Reserve Bank of Minneapolis.

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