Research

Workers who lose their jobs during recessions face strikingly large and persistent declines in their future earnings. Using individual-level administrative data from the United States, this paper shows that an important driver of these costs is the general equilibrium effect of firms simultaneously destroying many jobs during economic downturns. To obtain variation in the job destruction rate that is unrelated to the productivity of new jobs, we exploit the differential exposure of local labor markets to the idiosyncratic shocks of large, multi-region firms. We find that job destruction fluctuations explain one-third of the difference between the average worker’s cost of job loss in recessions and expansions. Accounting for additional spillover effects on employed workers, each marginal job that is destroyed imposes a total annual cost of approximately $17,000 on other workers in the same labor market. These negative spillovers could be offset by the potentially positive effects of job destruction on firm profits and the cleansing of low-quality jobs.  To quantify this trade-off, we estimate a general equilibrium search model that features heterogeneous firm productivity, job-to-job mobility, endogenous separations, and state-dependent human capital accumulation. To match our reduced-form estimates, the model requires that a spike in aggregate job destruction congests the labor market, reducing workers’ ability to find new jobs and limiting their human capital growth. Our results suggest that preventing the destruction of even low-productivity jobs can mitigate output losses from recessionary shocks.

We estimate the impact of household liquidity provision on macroeconomic stabilization using the 2020 CARES Act mortgage forbearance program. We leverage intermediation frictions in forbearance induced by mortgage servicers to identify the effect of reducing short-term payments with little change in long-term debt obligations on local labor market outcomes. Following statewide business reopenings, a 1 percentage point increase in the share of mortgages in forbearance leads to a 30 basis point increase in monthly employment growth in nontradable industries. In a model incorporating geographical heterogeneity in intermediation frictions, these responses imply a household-level marginal propensity to consume out of increased liquidity that aligns with existing estimates for direct fiscal transfers. The implied debt-financed fiscal multiplier effects of forbearance are sizable but depend on the repayment terms of deferred payments and the monetary policy stance.

We use administrative data from the U.S. Census Bureau to estimate the causal effects of loose credit conditions on firm employment and worker earnings. To obtain quasi-random variation in firms’ exposure to credit booms, we exploit the segmentation of high-yield (BB+ rated) versus investment grade (BBB- rated) firms in credit markets. Loose credit conditions generate cyclical fluctuations in employment: high-default risk firms create jobs during the credit boom, but then experience financial distress and destroy these jobs during the ensuing bust. We show that these firm-level boom-bust dynamics are transmitted to individual workers. To obtain quasi-random variation in workers’ exposure to boom-induced job creation, we exploit the importance of parental connections in determining where labor market entrants are first employed. We find that recent high-school graduates with parents at high-yield (BB+) firms can more easily find high-paying jobs during credit booms, compared to graduates with parents at investment-grade (BBB-) firms. But ten years later, graduates whose parents were at BB+ firms have substantially lower earnings. The magnitude of these negative long-term effects is comparable to the effect of entering the labor market during a recession. Our results suggest that loose credit market conditions lead firms to create short-lived jobs that impede workers’ long-run accumulation of human capital.