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The financial labor supply accelerator

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  • Jeffrey R. Campbell
  • Zvi Hercowitz

Abstract

The financial labor supply accelerator links hours worked to minimum down payments for durable good purchases. When these constrain a household's debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household debt, the strength of which depends positively on the minimum down-payment rate. Its potential macroeconomic importance comes from these labor supply fluctuations' procyclicality. This paper examines the comovement of hours worked and debt at the household level with PSID data before and after the financial deregulation of the early 1980s which reduced effective down payments and compares the evidence with results from model-generated data. The household-level data displays positive co-movement between hours worked and debt, which weakens after the financial reforms. An empirically realistic reduction of the model's required down payments generates a quantitatively similar weakening.

Suggested Citation

  • Jeffrey R. Campbell & Zvi Hercowitz, 2011. "The financial labor supply accelerator," Working Paper Series WP-2011-05, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-2011-05
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    References listed on IDEAS

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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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