Indebtedness and Unemployment: A Durable Relationship
Stockholm School of Economics Working Papers in Economics and Finance No. 186
36 Pages Posted: 19 Mar 1998
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: Suggested Citation
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