The Elephant in the Room: the Impact of Labor Obligations on Credit Markets

Xiaoji Lin, Xiaofei Zhao and Jack Favilukis
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Xiaofei Zhao: University of Texas-Dallas

No 896, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We show that labor market frictions are first-order for understanding credit markets. Wage growth and labor share forecast aggregate credit spreads and debt growth as well as or better than alternative predictors. They also predict credit risk and debt growth in a cross-section of international firms. Finally, high labor share firms choose lower financial leverage. A model with labor market frictions and risky long-term debt can explain these findings, and produce large credit spreads despite realistically low default probabilities. This is because pre-committed payments to labor make other committed payments (i.e. interest) riskier.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-rmg
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Journal Article: The Elephant in the Room: The Impact of Labor Obligations on Credit Markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:896

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