Jobless Recoveries and the Revolving Credit Revolution (Preliminary)

Abstract

Access to revolving credit more than doubled between 1983 and 1992 among both employed and unemployed households, and new evidence suggests that close to 20% of unemployed households use revolving credit to replace lost income. Labor markets have also experienced sluggish recoveries following the 1991, 2001, and 2007 recessions. These two facts motivate the question posed in this study: how has access to 'on-demand' credit changed the way labor markets respond to downturns? To answer this question, I build a model with risk averse agents who face both search frictions in the labor market and search frictions in the credit market. In the model, easy credit conditions provide a safety net that incentivizes agents to search for better paying jobs. Following a downturn, I find that an economy with easy credit access experiences a 10% larger drop in employment per capita compared to an economy in which credit is tight (e.g. a 2.2% drop in employment per capita with easy credit access versus a 2% drop with tight credit access).