Credit-Market Cyclicality and Unemployment Volatility

Hiring workers takes resources. Firms may require funding before they can expend resources on recruiting workers. The search for credit reduces funds that firms can allocate to job creation. In the presence of such costs, a given change in productivity will have a larger effect on job openings and therefore unemployment. These conclusions, however, are based on acyclical credit costs. When costs are cyclical, I show that the credit market can magnify or minify the response of unemployment to changes in productivity. When creditors’ cost of search for opportunities to finance firms’ recruitment efforts are procyclical, unemployment responds more to changes in productivity, a key business-cycle statistic. I demonstrate this result both analytically and with numerical simulations based on a nonlinear solution method. The results expose a previously underappreciated but important variable that affects labor-market dynamics.