Indebtedness and Unemployment: A Durable Relationship

Stockholm School of Economics Working Papers in Economics and Finance No. 186

36 Pages Posted: 19 Mar 1998

See all articles by Tore Ellingsen

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 1997

Abstract

Within a simple formal model, we show that there is a link between workers' consumption patterns and their preferred real wage. A large budget share of illiquid durable consumption goods (such as houses and cars) makes workers more willing to accept a low wage in order to reduce the probability of unemployment, but less willing to lower the real wage if labor demand unexpectedly falls. Moreover, as long as durable consumption goods are financed through imperfectly indexed credit, the budget share of illiquid durable goods affects the impact of inflation on the real wage. These predictions are confronted with data from sixteen OECD countries. We find that high household indebtedness lowers the natural rate of unemployment and increases real and nominal wage rigidity.

JEL Classification: E24, J51, J64

Suggested Citation

Ellingsen, Tore and Holden, Steinar, Indebtedness and Unemployment: A Durable Relationship (August 1997). Stockholm School of Economics Working Papers in Economics and Finance No. 186, Available at SSRN: https://ssrn.com/abstract=62687 or http://dx.doi.org/10.2139/ssrn.62687

Tore Ellingsen (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
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Norwegian School of Economics (NHH) - Department of Economics

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Norway

Steinar Holden

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
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+47 22 85 50 35 (Fax)

HOME PAGE: http://folk.uio.no/~sholden/

Norges Bank ( email )

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Oslo, N-0107
Norway

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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