Uncertainty and the Geography of the Great Recession Faculty Research Working Paper Series

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