Working Paper: NBER ID: w19997
Authors: Francisco J. Buera; Roberto Fattal Jaef; Yongseok Shin
Abstract: Why are financial crises associated with a sustained rise in unemployment? We develop a tractable model with frictions in both credit and labor markets to study the aggregate and micro-level implications of a credit crunch--i.e., a tightening of collateral constraints. When we simulate a credit crunch calibrated to match the observed decline in the ratio of debt to non-financial assets of the United States business sector following the 2007-8 crisis, our model generates a sharp decline in output--explained by a drop in aggregate total factor productivity and investment--and a protracted increase in unemployment. We then explore the micro-level impact by tracking the employment dynamics for firms of different sizes and ages. The credit crunch causes a much larger reduction in the net employment growth rate of small, young establishments relative to that of large, old producers, consistent with the recent empirical findings in the literature.
Keywords: credit crunch; unemployment; financial crises; labor markets
JEL Codes: E24; E44; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit crunch (E51) | decline in output (E23) |
| credit crunch (E51) | decline in aggregate total factor productivity (TFP) (O49) |
| credit crunch (E51) | reduction in labor demand by constrained entrepreneurs (J23) |
| credit crunch (E51) | expansion of production by unconstrained entrepreneurs (P12) |
| reallocation of labor from constrained to unconstrained entrepreneurs (J69) | job destruction (J63) |
| unemployment increases (J64) | labor demand reduction by constrained entrepreneurs (J23) |
| heterogeneous impacts of credit shocks (F65) | understanding aggregate behavior of economy (E10) |
| small young firms experience larger reduction in net employment growth (L26) | differential effects of credit shocks across firm types (H32) |