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Household debt and labour market fluctuations

  • Javier Andrés

    (Universidad de Valencia)

  • José E. Boscá

    (Universidad de Valencia)

  • Javier Ferri

    (Universidad de Valencia)

The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fl uctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. Our exercise shows that the dynamic pattern of the labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years. We set up a search model with effi cient bargaining and fi nancial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers’ equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages fi rms from opening vacancies, reducing the impact of the shock on employment.

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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1129.

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Length: 40 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:bde:wpaper:1129
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  20. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 631-653.
  21. Arnaud Cheron & Francois Langot, 2004. "Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 476-493, April.
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  24. 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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