Debt Constraints and Employment

Patrick Kehoe, Virgiliu Midrigan and Elena Pastorino

Journal of Political Economy, 2019, vol. 127, issue 4, 1926 - 1991

Abstract: During the Great Recession, US regions that experienced large declines in household debt also experienced large drops in consumption, employment, and wages. We develop a search and matching model in which tighter debt constraints raise the cost of investing in new job vacancies and so reduce job-finding rates and employment. On-the-job human capital accumulation is critical to generating sizable drops in employment: it increases the duration of the benefit flows from posting vacancies, thereby amplifying the employment drop from a credit tightening 10-fold relative to the standard model. Our model reproduces the salient cross-regional features of the US Great Recession.

Date: 2019
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Debt Constraints and Employment (2016)
Working Paper: Debt Constraints and Employment (2016)
Working Paper: Debt Constraints and Unemployment (2014)
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