Investigating the impact of auto loans on unemployment: the US experience

ABSTRACT

This paper explores the impact of automobile loan debt on US unemployment. Individuals with heterogeneous economic positions deem automobiles as important durable goods for unemployment exit and expected wage increases. The methodological approach makes use of an Autoregressive Distributed Lag (ARDL) Bound Testing modelling approach to document a negative and significant relationship between auto loans and unemployment. The results survive certain robustness tests, while they seem to confirm certain theoretical arguments posed in the literature, such as that the credit mechanism that dominates the transmission mechanism of monetary policy (credit shocks have a profound significant link with unemployment), while they seem to mitigate the role of alternative theories (where levered households suffer from a ‘debt overhang’ problem that distorts their preferences, making them demand high wages, and the ‘vacancy-posting’ effect) which imply that loans lead to high unemployment. The findings seem to provide significant recommendations to monetary policy makers on strengthening the banking services industry, providing an alternative to monetary policy for labour market intervention.

KEYWORDS:

• Auto loans
• unemployment
• US
• ARDL modelling

JEL CLASSIFICATION:

• E24
• E40

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Sales financing companies started as accounts receivable financing companies and then moved into instalment financing. They were purchasing instalment paper from retailers and financing retail inventories. According to Phelps (1952), it is the sale finance companies that boomed automotive companies in the 1920 s with the mass distribution of automobiles dependent on wholesale and retail financing. Famous brands, such as Toyota and General Electric, tend to rely on nonbank lenders, i.e. Southeast Toyota Finance Company, Toyota Motor Credit Company (Kaisha 1988), General Motors Acceptance Corporation (Sloan 1966), and Ford Motor Credit Company (Charles et al. 2008). Non-bank financing institutions have been the financing arms of the major automobile manufacturers in the U.S. for automobile credit.