The Interaction Between Credit and Labor Market Frictions
Abstract
ABSTRACT I study a novel two‐way feedback between credit and labor market frictions. Running from credit to labor markets, amplitude in capital demand caused by collateral constraints spills over onto labor demand due to the complementarity of capital and labor; and, furthermore, credit frictions raise effective financial hiring costs, prompting firms to delay hiring in recessions. Running back from labor to credit markets, search frictions imply that wages move less than one‐to‐one with productivity; this induces greater volatility of net worth, via the wage bill, which then spills over onto capital demand. Together, these considerably amplify labor and capital market dynamics.
Fields of Study & Subjects
Banking stability
regulation
efficiency
Economic Theory and Policy
Economic theories and models
Publication details
- Journal / source
- International Economic Review
- Publisher
- Wiley
- Volume
- 67
- Issue
- 4
- Pages
- 1309-1330
- Publication date
- 9 May 2026
- Language
- EN