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The Financial Labor Supply Accelerator

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  • Campbell, Jeffrey R.
  • Hercowitz, Zvi

Abstract

When minimum equity stakes in durable goods constrain a household’s debt, a persistent wage increase generates a liquidity shortage. This temporarily limits the income effect, so hours worked grow. This is the financial labor supply accelerator, which links labor supply decisions to limits on household borrowing. This paper examines its implications for the comovement of hours worked and household debt by comparing model-generated data with evidence from the PSID. The drastic deregulation of household debt markets in the early 1980s effectively reduced required equity stakes in durable goods. Since then, the estimated regression effect of mortgage debt on hours worked, interpreted as comovement rather than causality, has dropped dramatically. Analogous estimates from model-generated data display a quantitatively comparable fall after a calibrated reduction in equity requirements.

Suggested Citation

  • Campbell, Jeffrey R. & Hercowitz, Zvi, 2009. "The Financial Labor Supply Accelerator," Foerder Institute for Economic Research Working Papers 275727, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275727
    DOI: 10.22004/ag.econ.275727
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    1. Zvi Hercowitz & Jeffrey C. Campbell, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," 2005 Meeting Papers 120, Society for Economic Dynamics.
    2. Campbell, Jeffrey R. & Hercowitz, Zvi, 2009. "Welfare implications of the transition to high household debt," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 1-16, January.
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    Cited by:

    1. Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2018. "Changing credit limits, changing business cycles," European Economic Review, Elsevier, vol. 102(C), pages 211-239.

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