Access to credit helps unemployed consumers by giving them more time to find a new job with higher pay, according to research by economists from the University of Minnesota and Dartmouth College.
The researchers focused on access to revolving credit, including credit cards or revolving personal loans. The authors estimated that every dollar of additional unused credit limit is about half to three-quarters as potent as one dollar in unemployment benefits, in terms of extending the length of a jobless spell, according to a report in The Wall Street Journal.
The research compares credit used during unemployment to unemployment benefits consumers can receive."The findings, published by the National Bureau of Economic Research, suggest workers used personal credit to fund longer spells of unemployment so they could search for better jobs," The Wall Street Journal reports. "Just knowing they have the potential to borrow can affect a worker’s search decisions, even if they never draw down a credit line."
If credit access is available at sufficient levels, it helps consumers and the economy, according to the research.
"Being able to replace 5% of prior annual earnings on a credit card is equivalent to a 10% increase in unemployment insurance replacement rates," The Wall Street Journal reports.
Lower credit limits during an economic downturn causes employment to recover more quickly, “but output and productivity remain depressed. That’s because workers with few assets are less able to ’self-insure,’ and thus take less time to search and are more likely to take jobs at less productive firms,” according to The Wall Street Journal.U.S. consumers sharply increased their use of credit cards in March, pushing up total borrowing at the fastest pace in 15 years, according to the latest consumer borrowing report from the Federal Reserve.
The Fed reported that total consumer borrowing rose $29.7 billion in March, a 10% jump from the previous month. It was the largest percentage gain since a surge of 18.4% in November 2001, when consumer borrowing surged in response to government officials urging Americans to boost spending to support the economy following the September terrorist attacks.