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Firm Leverage and Unemployment 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 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.

Suggested Citation

  • Xavier Giroud & Holger M. Mueller, 2015. "Firm Leverage and Unemployment during the Great Recession," NBER Working Papers 21076, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21076
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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