Is Unemployment Due to Decreased Demand or More Expensive Financing?

“In short, cheap capital is important for employment.”:

Assessing the impact of the financial crisis on the US labour market, by Peter Auer, Raphael Auer, and Simon Wehrmüller, …In this column, we examine the extent to which the high cost of obtaining external funds has affected employment in US industries… We document that employment in sectors that are relatively more in need of external finance has indeed decreased to a much larger extent than employment in sectors less dependent on external sources of financing. In the aggregate, our results suggest that the increasing cost of external finance can account for much of the decline in employment witnessed in US industry since August 2007. …

Conclusion … We are now witnessing the start of potentially severe real consequences of the financial crisis. Our results suggest that much of these real consequences are driven by credit constraints rather than negative demand shocks or layoffs in sectors that are directly affected by the crisis.

Consequently, our results strengthen the case for measures aimed directly at restoring well-functioning financial markets. However, while reconstructing sustainable financial systems will be necessary, this alone will most probably not be sufficient for leading out of the crisis. Indeed, as the financial crisis enters more deeply into the real economy, also aggregate demand falters, which may justify demand-supporting policies. …

While freeing financial markets will certainly help, at this point we need a fiscal stimulus package, and we needed it to be in place months ago. I am disappointed that Congress is not giving the employment crisis the same amount of attention and concern that has been given to the financial sector. This is an economic emergency and every day that we wait to put a fiscal stimulus package in place costs more jobs and ruins more lives. There’s no excuse for taking those lives lightly. Congress needs to be working on this night and day, Democrats need to use every means at its disposal to round up the votes needed to override a potential veto from Bush, and they need to use public opinion to pressure Bush to sign the bill once it is ready (and why isn’t it ready now?). It may be fruitless presently given the administration’s opposition to offering the help that is needed, but the situation is dire and that’s not an excuse not to try. If there is strong public support for action, who knows, the administration may come around. In any case, by starting now we are more likely to have the stage set for immediate action once the new administration takes over. Even if the plan is vetoed, having the necessary debate and getting the stimulus package ready now lets those who will be responsible for implementing the plans once the new administration takes over know the broad outlines of what will be done, and this will give then a head start in planning for action. There’s no time to waste.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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