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Lending Relationships and Labor Market Dynamics

Alan Finkelstein Shapiroy () and Maria Olivero ()
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Alan Finkelstein Shapiroy: Tufts Unversity, Postal: 8 Upper Campus Rd., Braker Hall , Department of Economics , Tufts University , Medford, MA 02155

Authors registered in the RePEc Author Service: Alan Finkelstein Shapiro ()

No 2018-5, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: Standard models with search frictions in labor markets face limitations in replicating the empirical volatility of unemployment and market tightness in the U.S. In this paper we study the importance of endogenous labor force participation amid credit market disruptions in a labor search model with bank lending relationships. In response to both aggregate productivity and financial shocks that replicate the empirical volatility of labor force participation and volatility and cyclicality of credit spreads, the model produces more than 75 percent of the volatility of unemployment and 90 percent of the volatility of market tightness in the data. The interaction between endogenous participation in labor markets, and long-lasting lending relationships that quantitatively generate the cyclical behavior of credit spreads gives rise to sharper vacancy fluctuations amid financial shocks and plays a key role in replicating the data. In addition, we document a negative link between measures of credit-market distress and labor force participation alongside a positive link between measures of credit-market distress and unemployment. Moreover, we illustrate the policy importance of accounting for labor force participation by analyzing the effects of countercyclical credit subsidies. Only when labor force participation is an endogenous choice does this policy represent an effective stabilization tool.

Keywords: unemployment; endogenous labor force participation; financial shocks; deep habits in credit markets; lending relationships (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2018-05-07
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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Journal Article: Lending relationships and labor market dynamics (2020) Downloads
Working Paper: Lending Relationships and Labor Market Dynamics (2018) Downloads
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