Employment Decline during the Great Recession: The Role of Firm Size Distribution
Wenjian Xu, University of Michigan, Ph.D. candidate
Over 8 million jobs were lost in the Great Recession, creating widespread economic hardship. This paper documents a novel and robust empirical regularity, that highly concentrated local labor markets experienced larger employment declines during the Great Recession. I provide an explanation using a model with heterogeneous firms where recessions arise as an aggregate consequence of idiosyncratic firm shocks. My model predicts a larger decline in expected employment when the market has a higher initial concentration level. The key idea is that relatively small firms are unable to absorb the large number of workers that get displaced when relatively big firms are hit by idiosyncratic shocks, as the absorption is limited by decreasing returns to scale (at the firm) and an upward-sloping labor supply (in the local labor market). I undertake a series of empirical tests to rule out alternative explanations, and show that large employment losses in concentrated labor markets are not driven by highly concentrated industry-locations being hit harder during the Great Recession, having thinner labor markets, having more large firms, or having high firm leverage ratios.
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