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

January 2017

Working Paper Number:

CES-17-01

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.

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:
demand, market, economist, macroeconomic, quarterly, aggregate, leverage, recession, lending, bank, debt, declining, decline, fluctuation, regress, shock, downturn, supermarket, mortgage

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Ordinary Least Squares, Total Factor Productivity, Securities and Exchange Commission, Census Bureau Longitudinal Business Database, Organization for Economic Cooperation and Development, Longitudinal Business Database, Michigan Institute for Teaching and Research in Economics, Employer Identification Numbers, New York University, North American Industry Classification System, NBER Summer Institute

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