Firm Leverage and Unemployment during the Great Recession

NBER Working Paper No. 21076

Issued in April 2015, Revised in July 2015

NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Labor Studies


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.

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Document Object Identifier (DOI): 10.3386/w21076

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