Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 186: Indebtedness and Unemployment: A Durable Relationship

Tore Ellingsen () and Steinar Holden
Additional contact information
Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
Steinar Holden: Dept. of Economics, University of Oslo, Postal: P.O. Box 1095 Blindern, N-0317 Oslo, Norway

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

JEL-codes: E24; J51; J64

36 pages, August 21, 1997

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