Working Paper: NBER ID: w22614
Authors: Patrick Kehoe; Elena Pastorino; Virgiliu Midrigan
Abstract: During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession.
Keywords: Credit Constraints; Employment; Human Capital; Great Recession
JEL Codes: E21; E24; E32; J21; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tighter debt constraints (F65) | Reduction in job vacancies (J63) |
| Tighter debt constraints (F65) | Reduction in employment (J63) |
| Reduction in job vacancies (J63) | Reduction in employment (J63) |
| Tighter debt constraints (F65) | Increased cost of posting job vacancies (J63) |
| Increased cost of posting job vacancies (J63) | Reduced job finding rates (J68) |
| Reduced job finding rates (J68) | Reduction in employment (J63) |
| Credit tightening (E51) | Amplified drop in employment due to prolonged benefits of job matches (J68) |
| 10% drop in consumption (D12) | 55% drop in nontradable employment (F66) |
| Credit conditions (G21) | Employment outcomes (J68) |