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The Impact of Consumer Credit Access on Unemployment

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  • Kyle Herkenhoff

    (UCLA)

Abstract

Unemployed households' access to unsecured revolving credit (credit cards) nearly quadrupled from about 12 percent to about 45 percent over the last three decades. This paper analyzes how this large increase in revolving credit has impacted the business cycle. The paper develops a general equilibrium business cycle model with search in both the labor market and in the credit market. This generates a very rich and empirically plausible level of heterogeneity in work and credit histories while at the same time permitting a tractable model solution. Calibrating to the observed path of credit use between 1974 and 2012, I find that the large growth in credit access leads to deeper and longer recessions as well as moderately slower recoveries. Relative to an economy with credit fixed at 1970s levels, employment reaches its trough about 1 quarter later and remains depressed by up to .8 percentage points three years after the typical recession in this time period (e.g. employment is depressed by 2.8% rather than 2%). The mechanism is that when borrowing opportunities are easy to find, households optimally search for better-paying but harder-to-find jobs knowing that if the job search fails they can obtain credit to smooth consumption. Despite longer recessions and slower recoveries, increased credit card use enhances welfare by reducing consumption volatility and improving job-match quality.

Suggested Citation

  • Kyle Herkenhoff, 2014. "The Impact of Consumer Credit Access on Unemployment," 2014 Meeting Papers 448, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:448
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    References listed on IDEAS

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    1. The Impact of Consumer Credit Access on Unemployment
      by Christian Zimmermann in NEP-DGE blog on 2014-11-18 21:10:58

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    Cited by:

    1. Bednarzik, Robert W. & Kern, Andreas & Hisnanick, John J., 2017. "Displacement and Debt: The Role of Debt in Returning to Work in the Period Following the Great Recession," IZA Discussion Papers 10764, Institute for the Study of Labor (IZA).
    2. Enoch Hill & Kai Ding, 2016. "Cautious Hiring," 2016 Meeting Papers 291, Society for Economic Dynamics.

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