Debt Constraints and the Labor Wedge
Patrick Kehoe, Virgiliu Midrigan, Elena Pastorino
American Economic Review · 2016 · Volume 106 · Issue 5
Abstract
Changes in household debt and employment across regions of the U.S. during the Great Recession are highly correlated: regions where the decrease in household debt was most pronounced were also regions where the decline in employment was most severe. We show that the drop in employment in the regions that have experienced the largest decrease in household debt is mostly accounted for by changes in the labor wedge (deviations from a static consumption-leisure choice) as opposed to changes in real wages. We argue that such a pattern is consistent with fluctuations in debt constraints in a standard Bewley-Aiyagari model.
Keywords
Household Saving, Personal Finance, Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital, Aggregate Labor Productivity, Business Fluctuations, Cycles, Financial Crises, Time Allocation and Labor Supply, Wage Level and Structure, Wage Differentials, Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration, Regional Labor Markets, Population, Neighborhood Characteristics
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