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Labor Market Institutions, Liquidity Constraints, and Macroeconomic Stability

  • Frank R. Lichtenberg

The sensitivity of employment and real wages -- hence aggregate labor income to short-run fluctuations in output varies across countries. We develop a simple theoretical model to show that, if workers, but not capitalists, are liquidity constrained, the sensitivity of an economy to exogenous expenditure shocks is inversely related to the extent to which capitalists, rather than workers, bear fluctuations in income. We perform an econometric test of this proposition using cross-sectional, country-level data on elements of the (time-series) covariance matrix of output, employment, real wages, and investment. We argue that, for two reasons, our estimate of the elasticity of consumption with respect to labor income is likely to be biased towards zero. Nevertheless, our estimate of this parameter is highly significantly different from zero, and is also consistent with previous estimates (obtained from a completely different specification). The empirical results support the view that the lower the sensitivity of labor income to output fluctuations, the smaller the output fluctuations themselves will be. Low sensitivity contributes indirectly as well as directly to the stability of labor income.

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File URL: http://www.nber.org/papers/w3926.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3926.

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Date of creation: Dec 1991
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Publication status: published as Journal of Economic Behavior and Organization, vol. 28, no. 1, (September 1995), pp. 145-154
Handle: RePEc:nbr:nberwo:3926
Note: LS
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  1. Ito, Takatoshi & Kang, Kyoungsik, 1989. "Bonuses, overtime, and employment: Korea vs Japan," Journal of the Japanese and International Economies, Elsevier, vol. 3(4), pages 424-450, December.
  2. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
  3. Freeman, Richard B. & Weitzman, Martin L., 1987. "Bonuses and employment in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 1(2), pages 168-194, June.
  4. Jappelli, Tullio & Pagano, Marco, 1988. "Consumption and Capital Market Imperfection: An International Comparison," CEPR Discussion Papers 244, C.E.P.R. Discussion Papers.
  5. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  6. Katharine G. Abraham & Susan N. Houseman, 1993. "Job Security and Work Force Adjustment: How Different are U.S. and Japanese Practices?," Book chapters authored by Upjohn Institute researchers, in: Christopher F. Buechtemann (ed.), Employment Security and Labor Market Behavior: Interdisciplinary Approaches and International Evidence, pages 180-199 W.E. Upjohn Institute for Employment Research.
  7. Danthine, J.P. & Donaldson, J.B., 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Papers fb-_91-11, Columbia - Graduate School of Business.
  8. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, 07.
  9. Alan J. Auerbach & Kevin Hassett, 1991. "Corporate Savings and Shareholder Consumption," NBER Chapters, in: National Saving and Economic Performance, pages 75-102 National Bureau of Economic Research, Inc.
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