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The Effect of the Household Balance Sheet on Unemployment – Evidence from Spanish Provinces

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  • Schlegel, Jonas
  • Watzka, Sebastian

Abstract

This paper takes a close look at one of the possible causes of Spain’s severe crisis and studies the extent to which the increase in Spanish unemployment is due to the effects of household balance sheet effects. By estimating proxies for housing net worth shocks as well as household sector debt to disposable income ratios for 52 Spanish provinces together with detailed data on sectoral provincial unemployment data, we find that household balance sheet effects contribute a significant portion to the increase in unemployment between 2008 and 2010. Our outcomes confirm the results for the US from Mian and Sufi (2014). In contrast, for the time period between 2007 and 2014, we do not find any explanation power. Mostly interesting, we find contrary results for the episode between 2010 and 2014: Provinces, which cut back demand between 2007 and 2010 significantly strongly, did so significantly less than other provinces subsequently.

Suggested Citation

  • Schlegel, Jonas & Watzka, Sebastian, 2016. "The Effect of the Household Balance Sheet on Unemployment – Evidence from Spanish Provinces," VfS Annual Conference 2016 (Augsburg): Demographic Change 145911, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc16:145911
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    1. Markus K. Brunnermeier & Isabel Schnabel, 2014. "Bubbles and Central Banks: Historical Perspectives," Working Papers 1411, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 31 Oct 2014.
    2. Steve Keen, 2009. "Household Debt: The Final Stage in an Artificially Extended Ponzi Bubble," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(3), pages 347-357, September.
    3. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1469-1513.
    4. Frederic S. Mishkin, 1977. "What Depressed the Consumer? The Household Balance Sheet and the 1973-75 Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 123-174.
    5. Thomas I. Palley, 1994. "Debt, Aggregate Demand, and The Business Cycle: an Analysis in the Spirit of Kaldor and Minsky," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 16(3), pages 371-390, March.
    6. Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 38(4), pages 918-937, December.
    7. Atif Mian & Amir Sufi, 2014. "What Explains the 2007–2009 Drop in Employment?," Econometrica, Econometric Society, vol. 82, pages 2197-2223, November.
    8. Atif R. Mian & Amir Sufi, 2012. "What explains high unemployment? The aggregate demand channel," NBER Working Papers 17830, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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