The Financial Labor Supply Accelerator ∗

When minimum down payments for durable purchases constrain a household’s debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. This is the financial labor supply accelerator, which links labor supply to collateralized household borrowing. The mechanism generates a positive comovement of labor supply and household debt, whose strength depends positively on the minimum down-payment rate. Its potential macroeconomic importance comes from these labor supply fluctuations’ procyclicality. This paper examines the comovement of hours worked and debt at the household level with PSID data—before and after the financial deregulation of the early 1980s which reduced effective down payments—and compares the evidence with results from model-generated data. The household-level data displays positive comovement between hours worked and debt, which weakens after the financial reforms. An empirically realistic reduction of the model’s required down payments generates a quantitatively similar weakening. Revision: April 24, 2011 ∗We are grateful to Ross Doppelt for his expert research assistance and to Giuseppe Moscarini and Leif Danziger for their conference discussions. The views expressed herein are those of the authors. They do not necessarily reflect the views of the Federal Reserve Bank of Chicago, the Federal Reserve System, or its Board of Governors †Federal Reserve Bank of Chicago, U.S.A. ‡Tel-Aviv University, Israel JEL Code: E24