Abstract: This paper uses a large welfare reform in the UK to show that reductions in transfers have local multipliers that are concentrated in lower-income households. While average “savings per job” from welfare cuts are commensurate with estimates of the “cost per job” from spending increases, the lower employment likelihood post-reform is entirely borne by low-income groups. A feedback loop between lower local demand and employment explains this result: We show that low-income households reduce consumption of goods and services of local firms after the reform. Consistent with this reduction, in areas with higher cuts per capita, employment at small firms in the non-tradable sector drops. Since low-income individuals work in sectors more exposed to local demand, this makes them more likely to bear the drop in employment, which further amplifies the lower demand. The loss in benefits and labor income is associated with an increase in unsecured debt for low-income groups.
Discussant: Maria-teresa Marchica, Manchester Business School
Daisy Huang, Southwestern University of Finance and Economics
Amit Kumar, Singapore Management University
Abstract: We show that discovery of contamination by pollutants that are unmonitored and unregulated adversely affects local municipal finances and economic conditions. We causally document a 9-basis-points increase in primary market yields of municipal bonds from the counties where per- and polyfluoroalkyl substances (PFAS) contamination was discovered for the first time, vis-à-vis the bonds from bordering, uncontaminated, same-state counties. The yields increased more for riskier bonds. We link the increased yields to a reduction in allocation by mutual funds and banks in the municipal bonds from the affected counties. These counties subsequently experienced heightened out-migration and depressed public expenditure and employment.
Discussant: Jess Cornaggia, Pennsylvania State University
Abstract: Using both the onset of the US-China trade war in 2018 and the most recent Russia-Ukraine conflict and associated trade tensions, we show a counterintuitive pattern in global international trade. Namely, while the average firm trading with these nations significantly decreases their trade with these jurisdictions following sanctions, government-linked firms show a marked contrast. In particular, government-linked firms actually significantly increase their importing activity following the onset of formal sanctions. The increase is large, roughly 33% (t=4.01), following the shock, along with appearing tied to the sanction events. We find no increase for government-linked supplier firms generally to other countries (even countries in the same regions) at the same time, nor even of these same firms in these same regions at other times of no tension. In terms of mechanism, government supplier-linked firms are nearly twice as likely to receive tariff exemptions as equivalent firms doing trade in the region who are not government suppliers. More broadly, these effects are increasing in level of government connection. For instance, firms that are geographically closer to the agencies to which they supply increase their imports more acutely. Using micro-level data, we find that government supplying firms that recruit more employees with past government work experience also increase their importing activity more – particularly when the past employee worked in a government-contracting role. Lastly, we find evidence that this results in sizable accrued benefits in terms of firm-level profitability, market share gains, and outsized stock returns.
Discussant: Denis Sosyura, Arizona State University
