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The Financial Labor Supply Accelerator

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  • Campbell, Jeffrey R.
  • Hercowitz, Zvi

Abstract

When minimum equity stakes in durable goods constrain a household's debt, a per- sistent wage increase generates a liquidity shortage. This temporarily limits the income eect, so hours worked grow. This is the nancial labor supply accelerator, which links labor supply decisions to limits on household borrowing. This paper examines its implications for the comovement of hours worked and household debt by compar- ing model-generated data with evidence from the PSID. The drastic deregulation of household debt markets in the early 1980s eectively reduced required equity stakes in durable goods. Since then, the estimated regression eect of mortgage debt on hours worked, interpreted as comovement rather than causality, has dropped dramatically. Analogous estimates from model-generated data display a quantitatively comparable fall after a calibrated reduction in equity requirements.

Suggested Citation

  • Campbell, Jeffrey R. & Hercowitz, Zvi, 2009. "The Financial Labor Supply Accelerator," Foerder Institute for Economic Research Working Papers 275756, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275756
    DOI: 10.22004/ag.econ.275756
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    1. Zvi Hercowitz & Jeffrey C. Campbell, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," 2005 Meeting Papers 120, Society for Economic Dynamics.
    2. Campbell, Jeffrey R. & Hercowitz, Zvi, 2009. "Welfare implications of the transition to high household debt," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 1-16, January.
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    8. Jeffrey R. Campbell & Zvi Hercowitz, 2019. "Liquidity Constraints of the Middle Class," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 130-155, August.
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    Cited by:

    1. Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2018. "Changing credit limits, changing business cycles," European Economic Review, Elsevier, vol. 102(C), pages 211-239.

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