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How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output

Kyle Herkenhoff (), Gordon Phillips and Ethan Cohen-Cole ()
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Kyle Herkenhoff: University of Minnesota
Gordon Phillips: Dartmouth College Tuck School of Business
Ethan Cohen-Cole: Econ One Research

No 2017-012, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: How does access to consumer credit affect the allocation of workers to firms, and what happens to sorting and the subsequent recovery if credit tightens during a recession? To answer this question, we develop a labor sorting model with saving and borrowing. We show that even with two-sided heterogeneity and risk aversion, the model remains tractable because it admits a unique block recursive solution. We find that if credit limits tighten during a downturn, employment recovers quicker, but output and productivity remain depressed. This is because when limits tighten, low-asset, low-productivity job losers cannot self-insure. Therefore, they search less thoroughly and take more accessible jobs at less productive firms. We then build a new administrative dataset that merges credit reports with employment histories, and we test the model's mechanisms.

Keywords: sorting model; credit constraints; block recursive; self-insurance (search for similar items in EconPapers)
JEL-codes: E13 E20 E24 E32 J21 J24 J31 J60 J63 J64 J65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-upt
Date: 2017-02
Note: M
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Downloads: (external link) ... aint-job-finding.pdf First version, February 6, 2017 (application/pdf)

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