The Financial Labor Supply Accelerator

32 Pages Posted: 2 Jul 2011

See all articles by Jeffrey R. Campbell

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER)

Date Written: June 30, 2011

Abstract

The financial labor supply accelerator links hours worked to minimum down payments for durable good purchases. When these constrain a household's debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household debt, the strength of which depends positively on the minimum downpayment rate. Its potential macroeconomic importance comes from these labor supply fluctuations' procyclicality. This paper examines the comovement of hours worked and debt at the household level with PSID data - before and after the financial deregulation of the early 1980s which reduced effective down payments - and compares the evidence with results from model-generated data. The household-level data displays positive comovement between hours worked and debt, which weakens after the financial reforms. An empirically realistic reduction of the model's required down payments generates a quantitatively similar weakening.

Keywords: Borrowing Constraints, Durable Goods, Wage Shocks, Hours Worked

JEL Classification: E24

Suggested Citation

Campbell, Jeffrey R. and Hercowitz, Zvi, The Financial Labor Supply Accelerator (June 30, 2011). FRB of Chicago Working Paper No. 2011-05, Available at SSRN: https://ssrn.com/abstract=1875723 or http://dx.doi.org/10.2139/ssrn.1875723

Jeffrey R. Campbell (Contact Author)

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9916 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
35
Abstract Views
575
PlumX Metrics