When household debt outpaces employment: The Debt-Employment Divergence indicator[Quand la dette des ménages dépasse la dynamique de l’emploi : l’indicateur de divergence dette-emploi]

This study proposes a Debt-Employment Divergence Indicator (DEDI) that measures the extent to which household debt outpaces employment growth. The raw panel spans the period from 2007 to 2023, but the DEDI is constructed as a 3 year change and forecasts unemployment over a two year horizon with the feasible estimation window covering the period 2010 to 2021 involving 74 countries. We demonstrate that in economies ranked high and very high HDI economies higher levels of DEDI are associated with lower levels of unemployment in the short term, but a statistically significant increase in unemployment two years later. The positive t + 2 relationship is statistically significant in the baseline specification and robust even when controlling for household debt levels. This boom-bust pattern holds even after controlling for the total household debt levels. In essence, the DEDI is an early warning tool that helps detect debt-driven macroeconomic vulnerabilities for economies ranked high and very high on HDI.