College of Liberal Arts
During the past recession, regions of the United States that experienced the largest declines in household debt to income also experienced the largest drops in consumption and employment. These researchers are developing a search and matching model that reproduces such patterns. Tighter debt constraints raise workers' and firms' discount rates, thus reducing match surplus, vacancy creation, and employment. Two ingredients of this model, on-the-job human capital accumulation and worker debt constraints, greatly amplify the drop in employment. On-the-job human capital accumulation implies that the returns to posting a vacancy are backloaded so the surplus from a match is more sensitive to changes in firm discount rates. Worker debt constraints amplify these effects further by preventing wages from falling too much. These researchers show that the model reproduces salient cross-sectional features of the U.S. data, including the comovement between consumption, house prices, and debt-to-income, as well as tradable and non-tradable employment.