Financial Amplification of Labor Supply Shocks
35 Pages Posted: 30 Oct 2020
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
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