Long Shadow of the U.S. Mortgage Expansion: Evidence from Local Labour Markets

We construct U.S. county-level credit supply shocks by interacting the national mortgage growth of lenders in the early 2000s with a county’s initial exposure to those lenders. Counties with a more expansionary credit shock experienced a greater housing boom between 2003 and 2006 without a positive spillover to local labour market performance. During the Great Recession, the same counties experienced a larger drop in growth rates of mortgages, house prices and wages, and a larger increase in unemployment rates. While unemployment rates declined faster in those areas after the recession, wage growth remained depressed. The credit shock also induced a long-run increase in older firms’ employment share, suggesting a reduction in business dynamism.