Effects of Credit Supply on Unemployment and Inequality

26 Pages Posted: 7 Jul 2016

See all articles by Subhayu Bandyopadhyay

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Elias Dinopoulos

Department of Economics; University of Florida - Warrington College of Business Administration - Department of Economics

Bulent Unel

Louisiana State University, Baton Rouge

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Abstract

The Great Recession, which was preceded by the financial crisis, resulted in higher unemployment and inequality. We propose a simple model where firms producing varieties face labor-market frictions and credit constraints. In the model, tighter credit leads to lower output, lower number of vacancies, and higher directed-search unemployment. Where workers are more productive at higher levels of firm output, lower credit supply increases firm capital intensity, raises inequality by increasing the rental of capital relative to the wage, and has an ambiguous effect on welfare. At initial high levels of labor share in total costs tighter credit lowers welfare. This pattern reverses during an expansionary phase caused by higher credit availability.

Keywords: monopolistic competition, functional inequality, search unemployment, credit constraints

JEL Classification: D43, E24, G21, J31, J64, L11

Suggested Citation

Bandyopadhyay, Subhayu and Dinopoulos, Elias and Unel, Bulent, Effects of Credit Supply on Unemployment and Inequality. IZA Discussion Paper No. 10006. Available at SSRN: https://ssrn.com/abstract=2803838

Subhayu Bandyopadhyay (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
PO Box 442
St. Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

West Virginia University ( email )

Morgantown, WV 26506-6025
United States
304-293-7879 (Phone)
304-293-7061 (Fax)

Elias Dinopoulos

Department of Economics ( email )

Gainesville, FL 32610-0496
United States

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32611-7140
United States
352-392-8150 (Phone)
352-392-7860 (Fax)

Bulent Unel

Louisiana State University, Baton Rouge ( email )

Department of Economics
2134 Patrick F. Taylor Hall
Baton Rouge, LA 70803
United States

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