Working Paper: NBER ID: w27026
Authors: J. Carter Braxton; Kyle F. Herkenhoff; Gordon M. Phillips
Abstract: We show that unemployed individuals maintain significant access to credit. Following job loss, the unconstrained borrow, while the constrained default and delever. Both defaulters and borrowers are using credit to smooth consumption. We quantitatively show that long-term credit relationships and credit-registries allow the unemployed to partially offset income losses using credit. We estimate the model and find that the optimal provision of public insurance is unambiguously lower with greater credit access. Using a utilitarian welfare criterion, the optimal steady-state policy is to lower the replacement rate of public insurance from the current US policy of 41.2% to 38.3%. Moreover, lowering the replacement rate to 38.3% yields welfare gains to the majority of workers along the transition path.
Keywords: unemployment; credit access; public insurance; self-insurance; labor market policy
JEL Codes: D14; E21; E24; G51; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased credit access (G21) | lower optimal replacement rate (H55) |
| significant access to credit (G21) | partial offset of income losses (H31) |
| unconstrained borrowers (G21) | replace lost earnings using credit (G51) |
| constrained individuals (D10) | default and delever (G33) |
| credit markets facilitate consumption smoothing (D15) | optimal provision of public insurance lower (G52) |