Debt Constraints and Employment

Patrick Kehoe, Elena Pastorino and Virgiliu Midrigan

No 22614, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession.

JEL-codes: E21 E24 E32 J21 J64 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac, nep-sog and nep-ure
Note: AP EFG IFM LS ME
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Citations: View citations in EconPapers (39)

Published as Patrick J. Kehoe & Virgiliu Midrigan & Elena Pastorino, 2019. "Debt Constraints and Employment," Journal of Political Economy, vol 127(4), pages 1926-1991.

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Related works:
Journal Article: Debt Constraints and Employment (2019)
Working Paper: Debt Constraints and Employment (2016)
Working Paper: Debt Constraints and Unemployment (2014)
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