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Macroeconomic Stability and Wage Inequality: A Model with Credit and Labor Market Frictions

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  • Petra Marotzke

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    (Department of Economics, University of Konstanz, Germany)

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    Abstract

    While macroeconomic volatility in the US economy decreased since the early 1980's, individual earnings volatility and wage inequality increased. This paper argues that increasing financial development can contribute to both changes. I develop a real business cycle model with sectoral productivity shocks and labor as well as credit market frictions. Credit market frictions take the form of collateral-based credit constraints. It is shown that there are interactions between the labor and the credit market that matter for the development of wages and output. When workers are not perfectly mobile between sectors, financial development comes along with an increase in the volatility of individual earnings and in wage inequality, although aggregate output volatility is lower.

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    File URL: http://www.wiwi.uni-konstanz.de/workingpaperseries/WP_38-Marotzke-11.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2011-38.

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    Length: 39 pages
    Date of creation: 30 Sep 2011
    Date of revision:
    Handle: RePEc:knz:dpteco:1138

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    Related research

    Keywords: Financial development; labor market frictions; sectoral shocks; volatility; wage inequality;

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    References

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    1. Nicolas Petrosky-Nadeau, 2009. "Credit, Vacancies and Unemployment Fluctuations," GSIA Working Papers 2009-E27, Carnegie Mellon University, Tepper School of Business.
    2. Jerzmanowski, Michal & Nabar, Malhar, 2008. "Financial Development and Wage Inequality: Theory and Evidence," MPRA Paper 9841, University Library of Munich, Germany.
    3. Costas Azariadis & Leo Kaas, 2009. "Capital misallocation and aggregate factor productivity," Working Papers 2009-028, Federal Reserve Bank of St. Louis.
    4. Nicolas Petrosky-Nadeau & Etienne Wasmer, 2013. "The Cyclical Volatility of Labor Markets under Frictional Financial Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(1), pages 193-221, January.
    5. Cevdet Denizer & Murat F. Lyigun & Ann L. Owen, 2000. "Finance and macroeconomic volatility," International Finance Discussion Papers 670, Board of Governors of the Federal Reserve System (U.S.).
    6. repec:hal:cesptp:halshs-00389762 is not listed on IDEAS
    7. Leo Kaas, 2009. "Firm volatility and credit: a macroeconomic analysis," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 95-106.
    8. Dromel, Nicolas & Kolakez, Elie & Lehmann, Etienne, 2009. "Credit Constraints and the Persistence of Unemployment," IZA Discussion Papers 4501, Institute for the Study of Labor (IZA).
    9. Gueorgui Kambourov & Iourii Manovskii, 2009. "Occupational Mobility and Wage Inequality," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 731-759.
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