Labor Market Institutions, Liquidity Constraints, and Macroeconomic Stability

30 Pages Posted: 3 Jul 2007 Last revised: 29 Sep 2010

See all articles by Frank R. Lichtenberg

Frank R. Lichtenberg

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: December 1991

Abstract

The sensitivity of employment and real wages -- hence aggregate labor income to short-run fluctuations in output varies across countries. We develop a simple theoretical model to show that, if workers, but not capitalists, are liquidity constrained, the sensitivity of an economy to exogenous expenditure shocks is inversely related to the extent to which capitalists, rather than workers, bear fluctuations in income. We perform an econometric test of this proposition using cross-sectional, country-level data on elements of the (time-series) covariance matrix of output, employment, real wages, and investment. We argue that, for two reasons, our estimate of the elasticity of consumption with respect to labor income is likely to be biased towards zero. Nevertheless, our estimate of this parameter is highly significantly different from zero, and is also consistent with previous estimates (obtained from a completely different specification). The empirical results support the view that the lower the sensitivity of labor income to output fluctuations, the smaller the output fluctuations themselves will be. Low sensitivity contributes indirectly as well as directly to the stability of labor income.

Suggested Citation

Lichtenberg, Frank R., Labor Market Institutions, Liquidity Constraints, and Macroeconomic Stability (December 1991). NBER Working Paper No. w3926, Available at SSRN: https://ssrn.com/abstract=476114

Frank R. Lichtenberg (Contact Author)

Columbia Business School - Finance and Economics ( email )

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