Disentangling goods, labor, and credit market frictions in three European economies

an article by Thomas Brzustowski (London School of Economics, UK), Nicolas Petrosky-Nadeau (Federal Reserve Bank of San Francisco, USA) and Etienne Wasmer (Department of Economics and LIEPP, Sciences Po, Paris, France) published in Labour Economics Volume 50 (March 2018)

Highlights

• We build a flexible model with search frictions in three markets: credit, labor, and goods market. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and finally an economy with structural rigidities (Spain).
• Goods and credit market frictions play a dominant role in entry costs and account for up to 75% to 85% of total entry costs.
• The demand side amplification effects of adverse supply shocks (through income losses of consumers) remains limited to a range of 15% to 25% of the total impact of these supply shocks.
• Finally, the speed of matching in the goods market and in credit market accounts for a small fraction of unemployment: most of the variation in unemployment comes from the speed of matching in the labor market.

Abstract

We build a flexible model with search frictions in three markets: credit, labor, and goods markets.

We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain).

In these three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of the total entry costs.

In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers.

This adds up to, at most, an additional 15% to 25% to the impact of the shocks.

Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: most variation in unemployment comes from the speed of matching in the labor market.

Full text (PDF 17pp)

I tried reading it but admit that I am too far from using my maths/statistical knowledge in earnest to be able to make a lot of sense of the equations.

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