Collateral Constraints, Wage Rigidity, and Jobless Recoveries

Tobias Föll

The B.E. Journal of Macroeconomics, 2022, vol. 22, issue 2, 435-480

Abstract: The Great Recession has drawn attention to the importance of macro-financial linkages. In this paper I explore the joint role of imperfections in labor and financial markets for the cyclical adjustment of the labor market. I show that jobless recoveries emerge when, upon exiting a recession, firms are faced with deteriorating credit conditions. On the financial side, collateral requirements affect the cost of borrowing for firms. On the employment side, hiring frictions and wage rigidity increase the need for credit, making the binding collateral constraint more relevant. In a general equilibrium business cycle model with search and matching frictions, I illustrate that tightening credit conditions calibrated from data negatively affect employment adjustments during recovery periods. Wage rigidity substantially amplifies this mechanism, generating empirically plausible fluctuations in employment and output.

Keywords: financial frictions; unemployment; jobless recoveries; labor markets; search and matching; rigid wages (search for similar items in EconPapers)
JEL-codes: E24 E27 E32 E44 J63 J64 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/bejm-2020-0221

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