HEC Research Papers Series,
HEC Paris

Abstract: We study the effects of financial shocks on labor markets in a model with both labor and financial frictions, two types of productive capital, physical and intangible, and in which only the former serves as collateral. A tighter borrowing constraint in this environment leads to a fall in credit and investment, skewed in detriment of intangibles, which in its turn lowers the marginal product of labor and reduces the incentives to hire workers. When feeding into the model financial shocks estimated from the data, we find that they explain labor outcomes during the last three downturns in the US, including the sharp increase in unemployment during the great recession.

Keywords: Financial Shocks; Intangible Assets; Business Cycles; Employment Volatility

JEL-codes: E24; E32; E44

33 pages, March 8, 2016

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