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What explains high unemployment? The aggregate demand channel

  • Atif R. Mian
  • Amir Sufi

A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector are distributed uniformly across all counties. We find exactly this pattern from 2007 to 2009. Alternative hypotheses for job losses based on uncertainty shocks or structural unemployment related to construction do not explain our results. Using the relation between non-tradable sector job losses and demand shocks and assuming Cobb-Douglas preferences over tradable and non-tradable goods, we quantify the effect of aggregate demand channel on total employment. Our estimates suggest that the decline in aggregate demand driven by household balance sheet shocks accounts for almost 4 million of the lost jobs from 2007 to 2009, or 65% of the lost jobs in our data.

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File URL: http://www.nber.org/papers/w17830.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17830.

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Date of creation: Feb 2012
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Handle: RePEc:nbr:nberwo:17830
Note: CF EFG ME
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  1. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  2. Thomas Philippon & Virgiliu Midrigan, 2011. "Household Leverage and the Recession," 2011 Meeting Papers 261, Society for Economic Dynamics.
  3. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  4. Robert E. Hall, 2011. "The Long Slump," NBER Working Papers 16741, National Bureau of Economic Research, Inc.
  5. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1253-1296, August.
  6. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-56, August.
  7. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
  8. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
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