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