DP10539 | Firm Leverage and Unemployment during the Great Recession

Publication Date

12/04/2015

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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 (?high-leverage 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 find 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.