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  3. American Economic Review
  4. May 2016
  5. Debt Constraints and the Labor Wedge

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Debt Constraints and the Labor Wedge

  • Patrick Kehoe
  • Virgiliu Midrigan
  • Elena Pastorino
American Economic Review
vol. 106, no. 5, May 2016
(pp. 548–53)
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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.

Citation

Kehoe, Patrick, Virgiliu Midrigan, and Elena Pastorino. 2016. "Debt Constraints and the Labor Wedge." American Economic Review, 106 (5): 548–53. DOI: 10.1257/aer.p20161088

Additional Materials

JEL Classification

  • D14 Household Saving; Personal Finance
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E32 Business Fluctuations; Cycles
  • G01 Financial Crises
  • J22 Time Allocation and Labor Supply
  • J31 Wage Level and Structure; Wage Differentials
  • R23 Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics