Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 186:
Indebtedness and Unemployment: A Durable Relationship

Tore Ellingsen () and Steinar Holden

Abstract: Within a simple formal model, we show that there is a link between workers' consumption patterns and their preferred real wage. A large budget share of illiquid durable consumption goods (such as houses and cars) makes workers more willing to accept a low wage in order to reduce the probability of unemployment, but less willing to lower the real wage if labor demand unexpectedly falls. Moreover, as long as durable consumption goods are financed through imperfectly indexed credit, the budget share of illiquid durable goods affects the impact of inflation on the real wage. These predictions are confronted with data from sixteen OECD countries. We find that high household indebtedness lowers the natural rate of unemployment and increases real and nominal wage rigidity.

Keywords: Illiquid durables; unemployment; wage rigidity; household debt; (follow links to similar papers)

JEL-Codes: E24; J51; J64; (follow links to similar papers)

36 pages, August 21, 1997

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