Debt Constraints and the Labor Wedge
Patrick Kehoe (),
Virgiliu Midrigan and
Elena Pastorino ()
American Economic Review, 2016, vol. 106, issue 5, 548-53
Changes in household debt and employment across regions of the U.S. during the Great Recession are highly correlated: regions where the decrease in household debt was most pronounced were also regions where the decline in employment was most severe. We show that the drop in employment in the regions that have experienced the largest decrease in household debt is mostly accounted for by changes in the labor wedge (deviations from a static consumption-leisure choice) as opposed to changes in real wages. We argue that such a pattern is consistent with fluctuations in debt constraints in a standard Bewley-Aiyagari model.
JEL-codes: D14 E24 E32 G01 J22 J31 R23 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.p20161088
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