No. 1179 - Labor market and financial shocks: a time-varying analysis

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by Francesco Corsello and Valerio Nispi Landi June 2018

This paper studies empirically the effects of unexpected changes in financial conditions on the labor market. The analysis focuses on the United States and covers the period 1973-2016.

The results show that when the economy is hit by negative financial shocks - which historically are not frequent, though severe - unemployment rises considerably, labor market participation falls and wages decrease. Positive financial shocks - historically more frequent but of a smaller size - feature effects with opposite signs, but more modest impact. It follows the importance of policies aimed at preserving financial stability, such as macroprudential policies.

Forthcoming in: Journal of Money, Credit and Banking

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