## Financial Amplification of Labor Supply Shocks

_IMF Working Papers, September 18, 2020_

## Source details

**Canonical URL:** [Financial Amplification of Labor Supply Shocks](https://www.imf.org/en/publications/wp/issues/2020/09/18/financial-amplification-of-labor-supply-shocks-49743)

## Other formats

- [Markdown version](/en/publications/wp/issues/2020/09/18/financial-amplification-of-labor-supply-shocks-49743/index.md)
- [Structured JSON version](/en/publications/wp/issues/2020/09/18/financial-amplification-of-labor-supply-shocks-49743/index.json)
- [Bundle manifest](/en/publications/wp/issues/2020/09/18/financial-amplification-of-labor-supply-shocks-49743/bundle-manifest.json)

## Bibliographic details
- Authors: Nina Biljanovska, Alexandros Vardoulakis
- Published: September 18, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513557311.001

---

### Overview
- Authors: Nina Biljanovska, Alexandros Vardoulakis
- Date: September 18, 2020
- Core question: How do financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints?
- Model setup:
  - Workers supply labor to entrepreneurs.
  - Entrepreneurs borrow to purchase factors of production.
  - Borrowing capacity is restricted by the value of capital, creating a pecuniary externality when financing constraints bind.
  - A distributive externality operates through wages.
- Contextual example: Labor shocks such as the COVID-19 shock amplify policy responses depending on whether financing constraints bind.

### Key findings and mechanisms
- Financial amplification:
  - Financing constraints tied to collateral (value of capital) generate a pecuniary externality that amplifies labor supply shocks when constraints bind.
- Distributive externality:
  - Wages mediate a distributive externality that interacts with financing constraints to influence aggregate outcomes.
- Decentralization of planner’s allocation:
  - The planner’s allocation can be decentralized using two instruments:
    - a credit tax/subsidy
    - a labor tax/subsidy
- Policy response amplification:
  - Labor shocks amplify policy responses, and the nature of optimal policy critically depends on whether financing constraints are binding.

### Policy implications and instruments
- Two targeted instruments can implement the planner’s allocation:
  - Credit tax/subsidy to address pecuniary externalities arising from collateral constraints.
  - Labor tax/subsidy to correct distributive externalities transmitted through wages.
- Relevance for pandemic policy:
  - Labor supply shocks like those from COVID-19 strengthen the importance of assessing whether financing constraints bind when designing fiscal and credit interventions.

### Publication and metadata
- Series: Working Paper No. 2020/189
- Issue: 189
- Volume: 2020
- Pages: 34
- DOI: https://doi.org/10.5089/9781513557311.001
- Stock No: WPIEA2020189
- ISBN: 9781513557311
- ISSN: 1018-5941
- Citation preview (Chicago): Nina Biljanovska, and Alexandros Vardoulakis. "Financial Amplification of Labor Supply Shocks", IMF Working Papers 2020, 189 (2020), accessed 9/18/2026, https://doi.org/10.5089/9781513557311.001

*Source: IMF Working Papers landing page for "Financial Amplification of Labor Supply Shocks"*

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2020/english/wpiea2020189-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2020/english/wpiea2020189-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2020/09/18/financial-amplification-of-labor-supply-shocks-49743_