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

  • Petra Marotzke

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    (Department of Economics, University of Konstanz, Germany)

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    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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    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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    1. Denizer Cevdet A. & Iyigun Murat F. & Owen Ann, 2002. "Finance and Macroeconomic Volatility," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-32, October.
    2. Leo Kaas, 2009. "Firm volatility and credit: a macroeconomic analysis," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 95-106.
    3. Nicolas Petrosky-Nadeau, 2008. "Credit, Vacancies and Unemployment Fluctuations," 2008 Meeting Papers 640, Society for Economic Dynamics.
    4. Michal Jerzmanowski & Malhar Nabar, 2013. "Financial Development And Wage Inequality: Theory And Evidence," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 211-234, 01.
    5. Nicolas Dromel & Elie Kolakez & Etienne Lehmann, 2009. "Credit Constraints and the Persistence of Unemployment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00389762, HAL.
    6. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2010. "The Cyclical Volatility of Labor Markets under Frictional Financial Markets," IZA Discussion Papers 5131, Institute for the Study of Labor (IZA).
    7. Costas Azariadis & Leo Kaas, 2009. "Capital misallocation and aggregate factor productivity," Working Papers 2009-028, Federal Reserve Bank of St. Louis.
    8. 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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