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What then can account for the continued deterioration of the labor wedge in the latter half of the 1990s? My preferred hypothesis is that declines in land and share prices may have aggravated the labor wedge, with this negative impact coming in the form of collateral constraints. When collateral constraints are incorporated into a standard neoclassical growth model, a decrease in collateral values depresses consumption, causing a decrease in labor input. That is, it appears that in an economy where collateral constraints exist, the labor wedge deteriorates when asset prices continue to fall. This hypothesis seems convincing given that loans backed real estate are the primary means of financing in Japan and that land prices continued to fall in the second half of the 1990s and afterward.
Well guys, our collateral value's gone thanks to collapse of housing market, and soon labor input will go down the gutters.