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Indebtedness and Unemployment: A Durable Relationship

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Author Info

  • Ellingsen, Tore

    ()
    (Dept. of Economics, Stockholm School of Economics)

  • Holden, Steinar

    (Dept. of Economics, University of Oslo)

Abstract

Within a simple formal model, we show that there is a link between workers' consumption patterns and their preferred real wage. A large budget share of illiquid durable consumption goods (such as houses and cars) makes workers more willing to accept a low wage in order to reduce the probability of unemployment, but less willing to lower the real wage if labor demand unexpectedly falls. Moreover, as long as durable consumption goods are financed through imperfectly indexed credit, the budget share of illiquid durable goods affects the impact of inflation on the real wage. These predictions are confronted with data from sixteen OECD countries. We find that high household indebtedness lowers the natural rate of unemployment and increases real and nominal wage rigidity.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 186.

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Length: 36 pages
Date of creation: 21 Aug 1997
Date of revision:
Handle: RePEc:hhs:hastef:0186

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Web page: http://www.hhs.se/
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Keywords: Illiquid durables; unemployment; wage rigidity; household debt;

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References

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  1. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  2. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-36, June.
  3. Sanford J. Grossman & Guy Laroque, 1988. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," NBER Working Papers 2369, National Bureau of Economic Research, Inc.
  4. Oswald Andrew J., 1996. "A Conjecture on the Explanation for High Unemployment in the Industrialized Nations : Part I," The Warwick Economics Research Paper Series (TWERPS) 475, University of Warwick, Department of Economics.
  5. repec:fth:coluec:465 is not listed on IDEAS
  6. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
  7. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
  8. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-84, April.
  9. de Meza, David & Dickinson, Paul T., 1984. "Risk preferences and transaction costs," Journal of Economic Behavior & Organization, Elsevier, vol. 5(2), pages 223-236, June.
  10. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
  11. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  12. Bean, C R & Layard, P R G & Nickell, S J, 1986. "The Rise in Unemployment: A Multi-country Study," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S1-22, Supplemen.
  13. Mishkin, Frederic S, 1976. "Illiquidity, Consumer Durable Expenditure, and Monetary Policy," American Economic Review, American Economic Association, vol. 66(4), pages 642-54, September.
  14. Jacobson, Tor & Vredin, Anders & Warne, Anders, 1997. "Common trends and hysteresis in Scandinavian unemployment," European Economic Review, Elsevier, vol. 41(9), pages 1781-1816, December.
  15. Giraldi, Claudio & Hamaui, Rony & Rossi, Nicola, 1993. "Non-marketable assets and households' portfolio choices: A case study of Italy," Journal of Banking & Finance, Elsevier, vol. 17(6), pages 1171-1190, December.
  16. Bean, Charles R., 1994. "European unemployment: A retrospective," European Economic Review, Elsevier, vol. 38(3-4), pages 523-534, April.
  17. Phelps, Edmund S, 1992. "A Review of Unemployment," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1476-90, September.
  18. Berg, Lennart, 1994. "Household Savings and Debts: The Experience of the Nordic Countries," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 42-53, Summer.
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Citations

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Cited by:
  1. Seppo Honkapohja & Erkki Koskela, 1999. "The economic crisis of the 1990s in Finland," Economic Policy, CEPR & CES & MSH, vol. 14(29), pages 399-436, October.
  2. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts," PIER Working Paper Archive 06-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 07 Dec 2006.
  3. Andrew Postlewaite & Larry Samuelson & Dan Silverman, 2006. "Consumption Commitments and Employment Contracts, Fourth Version," PIER Working Paper Archive 07-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 09 Jul 2007.

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