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Household Debt Overhang and Unemployment

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  • JASON RODERICK DONALDSON
  • GIORGIA PIACENTINO
  • ANJAN THAKOR

Abstract

We use a labor‐search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household‐debt‐overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy posting effect implies that high household debt leads to high unemployment. Even though households borrow from banks via bilaterally optimal contracts, the equilibrium level of household debt is inefficiently high due to a household‐debt externality. We analyze the role that a financial regulator can play in mitigating this externality.

Suggested Citation

  • Jason Roderick Donaldson & Giorgia Piacentino & Anjan Thakor, 2019. "Household Debt Overhang and Unemployment," Journal of Finance, American Finance Association, vol. 74(3), pages 1473-1502, June.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:3:p:1473-1502
    DOI: 10.1111/jofi.12760
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    Cited by:

    1. Shai Bernstein & Timothy Mcquade & Richard R. Townsend, 2021. "Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession," Journal of Finance, American Finance Association, vol. 76(1), pages 57-111, February.
    2. Brown, Jennifer & Matsa, David A., 2020. "Locked in by leverage: Job search during the housing crisis," Journal of Financial Economics, Elsevier, vol. 136(3), pages 623-648.
    3. Jiru Song & Mingzheng Hu & Shaojie Li & Xin Ye, 2023. "The Impact Mechanism of Household Financial Debt on Physical Health in China," IJERPH, MDPI, vol. 20(5), pages 1-13, March.
    4. Jean‐Noël Barrot & Erik Loualiche & Matthew Plosser & Julien Sauvagnat, 2022. "Import Competition and Household Debt," Journal of Finance, American Finance Association, vol. 77(6), pages 3037-3091, December.
    5. Gyöngyösi, Győző & Rariga, Judit & Verner, Emil, 2021. "The anatomy of consumption in a household foreign currency debt crisis," SAFE Working Paper Series 332, Leibniz Institute for Financial Research SAFE.
    6. Catherine, Sylvain & Yannelis, Constantine, 2023. "The distributional effects of student loan forgiveness," Journal of Financial Economics, Elsevier, vol. 147(2), pages 297-316.
    7. Filipe Correia & Gustavo S. Cortes & Thiago C. Silva, 2021. "Is Corporate Credit Risk Propagated to Employees?," Working Papers Series 551, Central Bank of Brazil, Research Department.
    8. Asaf Bernstein, 2021. "Negative Home Equity and Household Labor Supply," Journal of Finance, American Finance Association, vol. 76(6), pages 2963-2995, December.
    9. Nagano, Mamoru & Uchida, Yuki, 2021. "Online Banking Users vs. Branch Visitors: Why Are Their Portfolio Returns Different?," MPRA Paper 105531, University Library of Munich, Germany.
    10. Machokoto, Michael & Bayai, Innocent & Kadzima, Marvelous, 2023. "The nonlinear impact of debt on employment: Does institutional quality matter?," Finance Research Letters, Elsevier, vol. 57(C).
    11. Kim, Wongi, 2023. "Private sector debt overhang and government spending multipliers: Not all debts are alike," European Economic Review, Elsevier, vol. 154(C).
    12. Jason Roderick Donaldson & Giorgia Piacentino & Anjan Thakor, 2021. "Intermediation Variety," Journal of Finance, American Finance Association, vol. 76(6), pages 3103-3152, December.
    13. Anjan V. Thakor, 2023. "Finance research: What are the new frontiers?," The Financial Review, Eastern Finance Association, vol. 58(3), pages 453-462, August.
    14. Cheol Eun & Lingling Wang & Tim Zhang, 2022. "House Price Growth Synchronization and Business Cycle Alignment," The Journal of Real Estate Finance and Economics, Springer, vol. 65(4), pages 675-710, November.

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