Jobs as Collateral: Employment Dynamics

39 Pages Posted: 20 Sep 2023

See all articles by Woon Gyu Choi

Woon Gyu Choi

International Monetary Fund (IMF)

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Abstract

We explain the dynamics of unemployment, job vacancies and job separations in the wake of the U. S. financial crisis of 2008-2009 as the interaction between credit and labor market frictions. In our model, jobs are a match between workers and capital. These matches act as both the productive capacity of firms and their collateral for necessary debt financing. A balance sheet shock dissolves these relationships, raises the financing costs of future job formation, and leads to a slow building but persistent increase in unemployment. We extend the model to allow for endogenous job separations and diminishing returns to home production. In the extension, job separations decline in a financial crisis, as workers stay in jobs to avoid the low reward home sector. This model can match the simultaneous decline in job creation and job destruction during the period, as well as the persistent rise in unemployment.

Keywords: financial accelerator, financial frictions, financial shock, labor-market search frictions, balance sheets, endogenous separations, monetary policy, credit policy

Suggested Citation

Choi, Woon Gyu and Cook, David E., Jobs as Collateral: Employment Dynamics. Available at SSRN: https://ssrn.com/abstract=4568929 or http://dx.doi.org/10.2139/ssrn.4568929

Woon Gyu Choi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

David E. Cook (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

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