HKS Faculty Research Working Paper Series
HKS Working Paper No. RWP15-014
We document the link between increased levels of economic and policy uncertainty and unemployment at the state-level during the 2007-2009 recession. The cross sectional variation in uncertainty robustly matches the distribution of employment outcomes during this period. When we instrument for this cross sectional variation using preexisting institutions, we find evidence for a causal role for uncertainty in increasing unemployment. A simple model of hiring and firing under uncertainty rationalizes these results, and the within-state distribution of effects across industries, occupations, and individuals is consistent with this model’s predictions. Together, these results suggest that increased uncertainty contributed to the severity of the Great Recession.
Shoag, Daniel, and Stan Veuger. "Uncertainty and the Geography of the Great Recession." HKS Faculty Research Working Paper Series RWP15-014, March 2015.