This paper studies the role of agency frictions and costly external finance in the dynamics of labor markets. The focus is on how credit-market frictions may amplify neutral technology shocks. The environment in which we study this question brings together a benchmark business-cycle model of financial frictions and a benchmark business-cycle model of labor search and-matching frictions. The main result is that aggregate technology shocks can lead to large cyclical fluctuations of labor market quantities in particular, unemployment, vacancies, and labor-market tightness, the quantities identified by Shimer (2005) as failing to be explained by standard search models. Our framework quantitatively accounts for the empirically observed large fluctuations of labor markets very well, even though it is calibrated to the cyclical nature of financial conditions rather than to the cyclicality of labor markets.
Surveys show that only 12% of high school seniors learn about money management in school. Most of us can’t remember learning about finances and how to handle our money while we were students, because chances are we didn’t. Historically, it has been up to parents to teach their children the skills needed to make smart choices, pay off debt, and build savings. Unfortunately, most of us end up learning these lessons the hard way after we’ve moved out on our own.
We fall into every trap at least once before we learn to avoid them. It is clear to us at Springboard Nonprofit Consumer Credit Management that there is a pressing need to provide financial education to our clients and the community at large. The importance of credit and financial education is built into our mission statement: Springboard is a nonprofit organization dedicated to consumer advocacy.
According to the empirical literature, from 1990 through 1992, Canada, the United Kingdom, the United States, and Finland had experienced supply-side crunches in parts of their credit markets. So had Japan in 1997 and 1998. During the crunch, credit worthy borrowers cannot get credit or cannot get it at reasonable terms; Would-be borrowers are unable to fund their investment projects; Lenders allegedly exhibit an attitude of excessive caution which may or may not be traceable to regulatory distortion; Banks reallocated the balance-sheet-asset by decreasing their loan holdings while dramatically increasing their security holdings (Green and Oh, 1991). This paper attempts to develop a dynamic general equilibrium model of financial intermediation and occupational choice based on empirical regularities to study the credit crunch and possible policy solutions.
