Jobs as Collateral: Employment Dynamics
39 Pages Posted: 20 Sep 2023
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
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