Financial Amplification of Labor Supply Shocks

Financial Amplification of Labor Supply Shocks
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Volume/Issue: Volume 2020 Issue 189
Publication date: September 2020
ISBN: 9781513557311
$18.00
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Topics covered in this book

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Labor , Economics- Macroeconomics , Taxation - General , WP , utility function , quantitative analysis , labor supply shock , pecuniary externality , collateral constraint , asset price , labor tax , distributive externality , labor shock , labor share , Labor supply , Collateral , Labor taxes , Supply shocks , Global , Collateral constraints , COVID-19 , pandemic , financial amplification

Summary

We study how financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints. Workers supply labor to entrepreneurs who borrow to purchase factors of production. Borrowing capacity is restricted by the value of capital, generating a pecuniary externality when financing constraints bind. Additionally, there is a distributive externality operating through wages. The planner’s allocation can be decentralized with two instruments: a credit tax/subsidy and a labor tax/subsidy. Labor shocks, such as the COVID-19 shock, amplify the policy responses, which critically depend on whether financing constraints bind or not.