What Explains the 2007-2009 Drop in Employment?

Abstract

We show that deterioration in household balance sheets, or the housing net worth channel, played a significant role in the sharp decline in U.S. employment between 2007 and 2009. Counties with a larger decline in housing net worth experience a larger decline in non‐tradable employment. This result is not driven by industry‐specific supply‐side shocks, exposure to the construction sector, policy‐induced business uncertainty, or contemporaneous credit supply tightening. We find little evidence of labor market adjustment in response to the housing net worth shock. There is no significant expansion of the tradable sector in counties with the largest decline in housing net worth. Further, there is little evidence of wage adjustment within or emigration out of the hardest hit counties.

The Masking of the Decline in Manufacturing Employment by the Housing Bubble

“…Using cross-region data, Mian and Sufi (2014) find that local areas that experienced larger declines in household net worth had larger reductions in employment in nontradable sectors during the 2007-2009period. Chodorow-Reich (2014 links the decline in employment to disruptions in the banking sector, by showing that firms that had pre-recession relationships with distressed banks were much less likely to secure credit during the recession, and were much more likely to shed employment during 2007-2009.…”

Policy Externalities and Banking Integration

“…*, ** and *** denotes significance at the 10%, 5% and 1% level, respectively. (2) and (4) further exclude industries in the non-tradable and construction sectors (as defined by Mian, Sufi et al (2014)). County-level demographic control variables, omitted for brevity, are the same as in Table 6.…”

“…Although this is unlikely, I nonetheless test for this. I do so by following Mian, Sufi et al (2014), who exploit the fact that for industries in the "tradable" sector, demand is driven by national or regional factors, as opposed to localized expenditure shocks. In this sense, industries in the tradable sector (for example, manufacturing) fundamentally differ from both non-tradable industries (e.g., retail and restaurants), as well as the construction sector, for which demand is driven primarily by local conditions.…”

Regional Heterogeneity and Monetary Policy

“…This is unsurprising since house price declines were associated with weakening labor markets during this period (Charles, Hurst, and Notowidigdo, 2013;Mian and Sufi, 2014), but it is important for interpreting the cross-region effects of monetary policy, since we will now show that refinancing activity responded least to QE1 in the locations with the least home equity.…”