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Household debt and labor market fluctuations

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  • Andrés, Javier
  • Boscá, José E.
  • Ferri, Javier

Abstract

The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers' equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment. We simulate the effects of an increase in both the loan-to-value ratio and the share of borrowers in total population. Our exercise shows that the response of labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 9 ()
Pages: 1771-1795

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:9:p:1771-1795

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: E24; E32; E44; Business cycle; Labor market; Borrowing restrictions;

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Cited by:
  1. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Leverage and Fiscal Multipliers," Working Papers 1103, International Economics Institute, University of Valencia.

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