New research by Xavier Giroud and Holger M. Mueller argues that the flat trendline for non-financial firms' leverage obscures substantial variation across firms, which proves important to understanding employment in the recession. Some firms saw large increases in leverage prior to the recession and others large declines. Using an establishment-level dataset with more than a quarter million observations, Giroud and Mueller find 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')."
|Source: Giroud and Mueller (2015)|
The authors emphasize that "we do not mean to argue that household balance sheets or those of financial intermediaries are unimportant. On the contrary, our results are consistent with the view that falling house prices lead to a drop in consumer demand by households (Mian, Rao, and Sufi (2013)), with important consequences for employment (Mian and Sufi (2014)). But households do not lay off workers. Firms do. Thus, the extent to which demand shocks by households translate into employment losses depends on how firms respond to these shocks."
"In fact, all of the job losses associated with falling house prices are concentrated among establishments of high-leverage firms. By contrast, there is no significant association between changes in house prices and changes in employment during the Great Recession among establishments of low-leverage firms."