Abstract
Is bad economic news a self‐fulfilling prophecy? This paper examines the local employment effects of exposure to pessimistic economic news. By combining detailed data on newspaper subscriptions with a tabulation of negative newspaper stories, the flow of such news across the United States during the 2008 recession is reconstructed at county and quarterly levels. The resulting data set is used to estimate the causal impact of such news on unemployment, hiring, and separation rates. Exposure to pessimistic news is found to suppress hiring and total employment during the early stages of the recession by up to 40% compared to prerecession levels; such news can account for some 7% of the total reduction in employment between 2007 and 2010. Content analysis of the articles in question rules out the possibility that this relationship is driven by reverse causation, that is, newspapers merely reporting poor economic performance. Further analysis of Google search data suggests that the effect is mediated by changes in public attitude caused by exposure to negative news. These findings imply that labor market outcomes can differ due to arbitrary differences in the dispersal of economic information. Bearings on economic theory, including the notions of “sunspots” and “animal spirits,” are discussed.
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