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Labor Market and Systemic Risk: a network-based approach

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  • Michel Alexandre
  • Thiago Christiano Silva

Abstract

In this paper, we explore the labor market channel of systemic risk. We consider that distressed firms, besides defaulting on part of their debt commitments, also react to negative shocks by lying off part of their employees. This constitutes another source of systemic risk, as these dismissed employees will not be able to honor their debt commitments. Using Brazilian data, we compute the systemic risk considering three possible strategies adopted by distressed firms: layoff of employees, default on debt commitments, or both strategies. Our findings underscore the significance of the labor market channel, as it has exhibited a noticeable rise in contribution to overall systemic risk in recent months. Moreover, we demonstrate that the amplification of initial shocks is more pronounced through this channel compared to the traditional firms’ loans channel. This study emphasizes the critical role played by the labor market in shaping systemic risk dynamics and calls for enhanced risk management practices to address these challenges effectively.

Suggested Citation

  • Michel Alexandre & Thiago Christiano Silva, 2023. "Labor Market and Systemic Risk: a network-based approach," Working Papers Series 584, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:584
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