Jobless and Wageless Growth: The Composition Effects of Credit Easing

59 Pages Posted: 19 Nov 2018 Last revised: 27 Oct 2020

Date Written: February 20, 2019

Abstract

The period of jobless and wageless growth that followed the great recession in the United States raises the question why expansionary credit policies were less effective for the recovery in employment and real wages in comparison to output. Using a structural time series analysis of the US credit and labor markets since 1965, I find that, indeed, credit supply expansions have been associated with a negative impact on the aggregate labor share. This paper offers one explanation that relies on the composition effects of credit expansion. I provide evidence that the pass-through of aggregate credit supply fluctuations to employment growth is stronger for industries that face higher borrowing costs. Firms in these industries prefer collateralizable capital to labor, and pay lower wages. Consequently, by increasing their share in total output and employment, the change in composition following an expansion in credit supply exerts negative pressure on the aggregate labor share. I build a dynamic model of heterogeneous firms and an aggregate financial sector, which accounts for the interaction between financial and labor market frictions. The model reproduces the negative composition effects of an aggregate credit supply expansion, and reconciles them with the positive within-firm effects predicted by models that abstract from the role of financial heterogeneity across firms. The paper, therefore, raises the concern that credit easing may not target firms that have strong potential to hire or pay high wages.

Keywords: credit supply, labor market, financial frictions, jobless growth, labor share

Suggested Citation

ElFayoumi, Khalid, Jobless and Wageless Growth: The Composition Effects of Credit Easing (February 20, 2019). Available at SSRN: https://ssrn.com/abstract=3270080 or http://dx.doi.org/10.2139/ssrn.3270080

Khalid ElFayoumi (Contact Author)

International Monetary Fund ( email )

Washington, DC
United States

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