Start-ups, House Prices, and the Jobless Recovery

Start-ups and young firms play a crucial role for US job creation: they grow faster and create more net jobs than older, incumbent firms. Yet since 2007 the number of start-ups in the US has declined by over 20%. Young firm’s below-trend job creation can account for almost all of the persistently high unemployment rate. In this paper I claim that this fact is related to the unprecedented fall in the value of real estate. I construct a model that captures the idea that start-ups require external financing, for which real estate is used as collateral. As the value of this collateral falls, start-up costs increase and the number of new firms declines. I calibrate and compute a quantitative competitive industry model with endogenous entry and exit, firm heterogeneity, labor adjustment costs, and aggregate shocks. It generates a jobless recovery and is able to explain over 80% of the increase and persistence in unemployment since the recession.