Consumption smoothing and the structure of labor and credit markets. IZA discussion paper 1052. 21 The idea here is that a demand shock can be assumed to take the form of an exogenous increase in the need for imports, which could have the same real effect

When borrowing is limited by possible insolvency, compression of labor income through taxation or other policies affords earlier consumption and higher wel-fare. And credit constraints also reduce the positive welfare effect of labor market turnover for workers whose labor income is temporarily low. These simple theoretical insights offer a rationale for the observed cross-country co-variation of labor market regulation and consumer credit. Available evidence indicates that the volume of consumer credit depends importantly on supply conditions in the financial industry, but is also related to labor market institu-tions and outcomes: credit demand is lower, but credit tends to be more easily available, in more rigid and regulated labor markets. The proposed frame-work of analysis offers more general insights as to ways in which historically determined features and politico-economic interactions may jointly shape in-stitutional aspects across labor and financial markets, and as to appropriate design of reform processes