Financial Amplification of Labor Supply Shocks

Nina Biljanovska and Alexandros Vardoulakis

No 2020/189, IMF Working Papers from International Monetary Fund

Abstract: We study how financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints. Workers supply labor to entrepreneurs who borrow to purchase factors of production. Borrowing capacity is restricted by the value of capital, generating a pecuniary externality when financing constraints bind. Additionally, there is a distributive externality operating through wages. The planner’s allocation can be decentralized with two instruments: a credit tax/subsidy and a labor tax/subsidy. Labor shocks, such as the COVID-19 shock, amplify the policy responses, which critically depend on whether financing constraints bind or not.

Keywords: WP; utility function; quantitative analysis; labor supply shock; pecuniary externality; collateral constraint; asset price; labor tax; distributive externality; labor shock; labor share; Labor supply; Collateral; Labor taxes; Supply shocks; Global; Collateral constraints; COVID-19; pandemic; financial amplification (search for similar items in EconPapers)
Pages: 34
Date: 2020-09-18
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-upt
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