Unemployment and the Consumer Credit Market

When a consumer borrows money to make a large purchase, his ability to pay down his loan is dependent on his likelihood to remain employed. Trends in the labor market provide valuable information regarding an employed person’s expected duration of employment as well as his expected duration of unemployment if he loses his job in the future. By understanding the relationship between the unemployment, separation, and job-finding rates, lenders can better predict the performance of their consumer loans. This paper models the potential effects of trends in the employment rate on loan performance and supports these results with empirical evidence from the used car industry. * I would like to thank Jon Levin for his exceptional help as a mentor throughout the entire process. Valdo Durrleman and Amir Dembo provided excellent advice when I needed help getting my ideas off the ground. I would also like to thank Paul Kaplan, Mark Sauder, and Ernie Garcia for giving me the opportunity to work with an extraordinary company, and finally my family for their patience and support. 1