American Economic Review Vol. 106 No. 5 2016

Debt Constraints and the Labor Wedge

Patrick J. Kehoe¹; Virgiliu Midrigan²; Elena Pastorino¹

¹ Department of Economics, University of Minnesota, 4-101 Hanson Hall, 1925 Fourth Street South, Minneapolis, MN 55455 (e-mail: ) · ² Department of Economics, New York University, 19 W. 4th Street, 6FL, New York, NY 10012 (e-mail: )

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 constrain01/2ts in a standard Bewley-Aiyagari model.

DOI

10.1257/aer.p20161088

Volume

106

Issue

5

Pages

548-553

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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