What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors.
Understanding the large and persistent decline in employment in the United States during the Great Recession of 2007–09 remains one the most vexing challenges in macroeconomics. While there are many potential explanations, three have garnered substantial support among economists:
The aggregate demand channel, in which job losses were driven by a sharp decline in consumer spending due to high debt levels and the housing crash (Mian and Sufi 2012).
Government-induced uncertainty, in which business uncertainty about taxes and regulation fostered reluctance to hire (Baker, Bloom, and Davis 2013; Leduc and Liu 2012a, b). For example, Hubbard et al. (2012) write that “uncertainty over policy—particularly over tax and regulatory policy—limited both the recovery and job creation.”
Business financing problems, in which businesses were unable to get credit because of continued troubles in the banking sector. Credit-starved businesses can’t pursue potentially profitable projects, reducing their hiring.
This Economic Letter tests these alternative views using state-level data from National Federation of Independent Businesses (NFIB) monthly small business surveys (Dunkelberg and Wade 2012). One enlightening survey question asks what is the single most important problem facing the respondent’s business. Potential answers include taxes, inflation, poor sales, financing and interest rates, cost of labor, government requirements and red tape, competition from large businesses, quality of labor, costs or availability of insurance, and other. The NFIB has generously provided us quarterly responses by state.
Chosen excerpts by Job Market Monitor from