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Collateral Constraints, Wage Rigidity, and Jobless Recoveries

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  • Föll Tobias

    (Center for Macroeconomic Research, University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany)

Abstract

The Great Recession has drawn attention to the importance of macro-financial linkages. In this paper I explore the joint role of imperfections in labor and financial markets for the cyclical adjustment of the labor market. I show that jobless recoveries emerge when, upon exiting a recession, firms are faced with deteriorating credit conditions. On the financial side, collateral requirements affect the cost of borrowing for firms. On the employment side, hiring frictions and wage rigidity increase the need for credit, making the binding collateral constraint more relevant. In a general equilibrium business cycle model with search and matching frictions, I illustrate that tightening credit conditions calibrated from data negatively affect employment adjustments during recovery periods. Wage rigidity substantially amplifies this mechanism, generating empirically plausible fluctuations in employment and output.

Suggested Citation

  • Föll Tobias, 2022. "Collateral Constraints, Wage Rigidity, and Jobless Recoveries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 22(2), pages 435-480, June.
    • Handle: RePEc:bpj:bejmac:v:22:y:2022:i:2:p:435-480:n:5
    DOI: 10.1515/bejm-2020-0221
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    More about this item

    Keywords

    financial frictions; unemployment; jobless recoveries; labor markets; search and matching; rigid wages;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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