The global financial recession of 2008-9 as well as historical precedents with financial crises suggest that financial shocks do translate into the labor markets. In this paper we first document that financial recessions are different from other recessions in terms of their labor market impact, as they involve a larger employment/unemployment response conditioning on output. Second, we survey the various mechanisms linking financial shocks to employment adjustment, developing a new theory of the effects of leverage on job creation and destruction. Third, we present evidence coherent with one of such mechanisms, notably with the prediction that more leveraged firms experience larger job destruction during financial recessions, controlling for the scale of output falls.
Financial Shocks and Labor: Facts and Theories
BOERI, TITO MICHELE;GARIBALDI, PIETRO;
2013
Abstract
The global financial recession of 2008-9 as well as historical precedents with financial crises suggest that financial shocks do translate into the labor markets. In this paper we first document that financial recessions are different from other recessions in terms of their labor market impact, as they involve a larger employment/unemployment response conditioning on output. Second, we survey the various mechanisms linking financial shocks to employment adjustment, developing a new theory of the effects of leverage on job creation and destruction. Third, we present evidence coherent with one of such mechanisms, notably with the prediction that more leveraged firms experience larger job destruction during financial recessions, controlling for the scale of output falls.
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