Financial Amplification of Labor Supply Shocks

35 Pages Posted: 30 Oct 2020

See all articles by Nina Biljanovska

Nina Biljanovska

International Monetary Fund (IMF)

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System

Date Written: September 2020

Abstract

We study how financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints. Workers supply labor to entrepreneurs who borrow to purchase factors of production. Borrowing capacity is restricted by the value of capital, generating a pecuniary externality when financing constraints bind. Additionally, there is a distributive externality operating through wages. The planner's allocation can be decentralized with two instruments: a credit tax/subsidy and a labor tax/subsidy. Labor shocks, such as the COVID-19 shock, amplify the policy responses, which critically depend on whether financing constraints bind or not.

Keywords: Labor supply, Collateral, Labor taxes, Supply shocks, Labor, WP, graphic tag0, inline-graphic tag0, utility function, math xmlns, quantitative analysis

JEL Classification: E44, J20, G21, H24, Q11, J01

Suggested Citation

Biljanovska, Nina and Vardoulakis, Alexandros, Financial Amplification of Labor Supply Shocks (September 2020). IMF Working Paper No. 20/189, Available at SSRN: https://ssrn.com/abstract=3721214

Nina Biljanovska (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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