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How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output

How does access to consumer credit affect the allocation of workers to firms, and what happens to sorting and the subsequent recovery if credit tightens during a recession? To answer this question, we develop a labor sorting model with saving and borrowing. We show that even with two-sided heterogeneity and risk aversion, the model remains tractable because it admits a unique block recursive solution. We find that if credit limits tighten during a downturn, employment recovers quicker, but output and productivity remain depressed. This is because when limits tighten, low-asset, low-productivity job losers cannot self-insure. Therefore, they search less thoroughly and take more accessible jobs at less productive firms. We then build a new administrative dataset that merges credit reports with employment histories, and we test the model's mechanisms.

Authors: 
Kyle Herkenhoff, University of Minnesota
Gordon Phillips, Dartmouth College Tuck School of Business
Ethan Cohen-Cole, Econ One Research
Publication Date: 
February, 2017
HCEO Working Groups: 
Publication Status: 
Document Number: 
2017-012
File Description: 
First version, February 6, 2017