Household Debt and Labor Market Fluctuations

Javier Andrés (), José Boscá and Javier Ferri

No 1102, Working Papers from International Economics Institute, University of Valencia

Abstract: The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers’ equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment. We simulate the effects of a continuous increase in both the loan-to-value ratio and the share of borrowers in total population. Our exercise shows that the response of labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years.

Keywords: business cycle; labor market; borrowing restrictions (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011-04
New Economics Papers: this item is included in nep-ban, nep-bec, nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Household debt and labor market fluctuations (2013)
Working Paper: Household debt and labour market fluctuations (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:iei:wpaper:1102

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