Working Paper 2016-06: Kyle Herkenhoff, Gordon Phillips, Ethan Cohen-Cole

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Credit-limits-working-paper

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Authors:

Kyle Herkenho ff, University of Minnesota
Gordon Phillips, Dartmouth, University of Maryland, & NBER
Ethan Cohen-Cole, Econ One Research


Abstract:

We empirically and theoretically examine how consumer credit access a ffects displaced workers. Empirically, we link administrative employment histories to credit reports. We show that an increase in credit limits worth 10% of prior annual earnings allows individuals to take .15 to 3 weeks longer to find a job. Conditional on fi nding a job, they earn more and work at more productive rms. We develop a labor sorting model with credit to provide structural estimates of the impact of credit on employment outcomes, which we find are similar to our empirical estimates. We use the model to understand the impact of consumer credit on the macroeconomy. We find that if credit limits tighten during a downturn, employment recovers quicker, but output and productivity remain depressed. This is because when limits tighten, low-asset, low-productivity job losers cannot self-insure. Therefore, they search less thoroughly and take more accessible jobs at less productive firms.