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The Labor Market Consequences of Financial Crises With or Without Inflation: Jobless and Wageless Recoveries

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  • Guillermo A. Calvo
  • Fabrizio Coricelli
  • Pablo Ottonello

Abstract

This paper offers empirical evidence showing that, relative to "normal" recessions, financial crises hit the labor market by either enhancing the degree of joblessness and/or by further depressing the real wage – a situation that the paper labels "wageless recovery." This holds for a sample of both advanced and emerging-market economies recession episodes, using credit market data prior to the recession episode as instrumental variable for financial crises. Results also indicate that inflation determines the type of recovery: low inflation is associated with jobless recovery, while high inflation is associated with wageless recovery. The paper shows that these outcomes are consistent with a simple model in which collateral requirements are higher (lower), the larger is the share of labor costs (physical capital expenditure) involved in a loan contract. This is motivated by the conjecture that if a loan becomes delinquent, physical capital is easier to confiscate than human capital. Evidence from advanced economies supports the model. An implication of these findings is that a spike of inflation during financial crisis may help to reduce jobless recoveries, but at the expense of sharply lower real wages. Only relaxing credit constraint might help both unemployment and wages.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18480.

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Date of creation: Oct 2012
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Handle: RePEc:nbr:nberwo:18480

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Citations

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Cited by:
  1. Jarko Fidrmuc & Caroline Klein & Robert W.R. Price & Andreas Wörgötter, 2013. "Slovakia: A Catching Up Euro Area Member In and Out of the Crisis," OECD Economics Department Working Papers 1019, OECD Publishing.
  2. Anton Korinek & Jonathan Kreamer, 2013. "The Redistributive Effects of Financial Deregulation," NBER Working Papers 19572, National Bureau of Economic Research, Inc.
  3. Jarko Fidrmuc & Andreas Wörgötter, 2013. "Slovakia: The Consequences of Joining the Euro Aea before the Crisis for a Small Catching-up Economy," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 14(1), pages 57-63, 05.
  4. Guillermo A. Calvo, 2012. "The Price Theory of Money, Prospero's Liquidity Trap, and Sudden Stop: Back to Basics and Back," NBER Working Papers 18285, National Bureau of Economic Research, Inc.
  5. Bernal-Verdugo, Lorenzo E. & Furceri, Davide & Guillaume, Dominique, 2013. "Banking crises, labor reforms, and unemployment," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1202-1219.
  6. Guillermo Calvo, 2013. "Puzzling over the Anatomy of Crises: Liquidity and the Veil of Finance," IMES Discussion Paper Series 13-E-09, Institute for Monetary and Economic Studies, Bank of Japan.

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