Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 536 Abstract:
During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession.
Keyword: Debt constraints, Human capital, Search and matching, and Employment Subject (JEL): J21 - Labor Force and Employment, Size, and Structure, E21 - Macroeconomics: Consumption; Saving; Wealth, J64 - Unemployment: Models, Duration, Incidence, and Job Search, E32 - Business Fluctuations; Cycles, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Schulhofer-Wohl, Sam Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 462 Abstract:
How well do people share risk? Standard risk-sharing regressions assume that any variation in households’ risk preferences is uncorrelated with variation in the cyclicality of income. I combine administrative and survey data to show that this assumption is questionable: Risk-tolerant workers hold jobs where earnings carry more aggregate risk. The correlation makes risk-sharing regressions in the previous literature too pessimistic. I derive techniques that eliminate the bias, apply them to U.S. data, and find that the effect of idiosyncratic income shocks on consumption is practically small and statistically difficult to distinguish from zero.
Keyword: Imperfect insurance, Heterogeneity, Risk sharing, and Risk preferences Subject (JEL): E21 - Macroeconomics: Consumption; Saving; Wealth and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity