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Effects of Credit Supply on Unemployment and Inequality

Subhayu Bandyopadhyay (), Elias Dinopoulos () and Bulent Unel ()
Additional contact information
Elias Dinopoulos: University of Florida
Bulent Unel: Louisiana State University

No 10006, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The Great Recession, which was preceded by the financial crisis, resulted in higher unemployment and inequality. We propose a simple model where firms producing varieties face labor-market frictions and credit constraints. In the model, tighter credit leads to lower output, lower number of vacancies, and higher directed-search unemployment. Where workers are more productive at higher levels of firm output, lower credit supply increases firm capital intensity, raises inequality by increasing the rental of capital relative to the wage, and has an ambiguous effect on welfare. At initial high levels of labor share in total costs tighter credit lowers welfare. This pattern reverses during an expansionary phase caused by higher credit availability.

Keywords: search unemployment; functional inequality; monopolistic competition; credit constraints (search for similar items in EconPapers)
JEL-codes: D43 E24 G21 J31 J64 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lma and nep-mac
Date: 2016-06
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