Author(s)  
Kyle Herkenhoff, Gordon Phillips, Ethan Cohen-Cole

How does access to consumer credit affect the allocation of workers to firms, and what happens to sorting and the subsequent recovery if credit tightens during a recession? To answer this question, we develop a labor sorting model with saving and borrowing. We show that even with two-sided heterogeneity and risk aversion, the model remains tractable because it admits a unique block recursive solution. 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. We then build a new administrative dataset that merges credit reports with employment histories, and we test the model's mechanisms.

JEL Codes  
E13: General Aggregative Models: Neoclassical
E20: Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E32: Business Fluctuations; Cycles
J21: Labor Force and Employment, Size, and Structure
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
J31: Wage Level and Structure; Wage Differentials
J60: Mobility, Unemployment, and Vacancies: General
J63: Labor Turnover; Vacancies; Layoffs
J64: Unemployment: Models, Duration, Incidence, and Job Search
J65: Unemployment Insurance; Severance Pay; Plant Closings
Keywords  
sorting model
credit constraints
block recursive
self-insurance