Household Credit and Employment in the Great Recession

How much did the contraction in the supply of credit to households contribute to the decline in employment during the Great Recession? To answer this question I provide new estimates of: (1) the elasticity of employment with respect to household credit; and (2) the size of the supply shock to household credit. I exploit a county’s exposure to the collapse of a large and previously healthy lender as a natural experiment. This gives an estimated elasticity of employment with respect to household credit of 0.3, caused by declines in both housing and non-housing demand. To estimate the size of the credit supply shock I use non-parametric methods to identify lenderspecific supply-side shocks, which I then aggregate into a simple measure of credit supply shocks to counties. Combining this measure with estimates of the elasticity of employment with respect to the measure, I calculate that shocks to household credit were responsible for at least a 3.6% decline in employment from 2007 to 2010. *Email: [email protected]. Address: 530 Evans Hall #3880, Berkeley, CA 94720-3880. Phone: 510-684-3264. For the most recent version of this paper please check https://sites.google.com/site/johnnelsonmondragon/. I am deeply indebted to my advisor Yuriy Gorodnichenko, as well as Olivier Coibion, Amir Kermani, Christina Romer, and David Romer for their patience, guidance, and support. I also thank Gabriel Chodorow-Reich, Pierre-Olivier Gourinchas, Erik Johnson, Joshua Hausman, Kari Heerman, Martha Olney, Joshua Miller, Demian Pouzo, David Sraer, Johannes Wieland, and especially Mu-Jeung Yang, as well as seminar participants at Berkeley, the University of Washington, and the Federal Reserve Bank of Richmond. The National Science Foundation and the Federal Reserve Bank of Richmond both provided valuable support while this research was conducted. All errors are my own.