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

Thomas Brzustowski (1) , Nicolas Petrosky-Nadeau (2) , Etienne Wasmer (3)

1 LSE - London School of Economics and Political Science
2 Tepper School of Business
3 ECON - Département d'économie (Sciences Po)

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 the three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of 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 of the variation in unemployment comes from the speed of matching in the labor market.

Keywords: Goods market; Credit market; Unemployment

Domains: Humanities and Social Sciences; Economics and Finance

Thomas Brzustowski, Nicolas Petrosky-Nadeau, Etienne Wasmer. Disentangling goods, labor and credit market frictions in three European economies. 2015. ⟨hal-03393222⟩