Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession

Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession

By Shai Bernstein, Timothy James McQuade, Richard R. Townsend
March 18,2018Working Paper No. 3649

We investigate how the deterioration of household balance sheets affects worker productivity, and whether such effects mitigate or amplify economic downturns. To do so, we compare the output of innovative workers who were employed at the same firm and lived in the same area at the onset of the 2008 crisis, but who experienced different declines in housing wealth. We find that following a negative wealth shock, innovative workers become less productive, and generate lower economic value for their firms. Consistent with a financial distress channel, the effects are more pronounced among those with little home equity before the crisis and those with fewer outside labor market opportunities.