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Unemployment and liquidity constraints

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Author Info
Yannis M. Ioannides (Department of Economics, Tufts University, Medford, Massachusetts, USA)
Vassilis A. Hajivassiliou (Department of Economics, London School of Economics, London, UK)

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Abstract

We present a dynamic framework for the interaction between borrowing (liquidity) constraints and deviations of actual hours from desired hours, both measured by discrete-valued indicators, and estimate it as a system of dynamic binary and ordered probit models with panel data from the Panel Study of Income Dynamics. We analyze a household's propensity to be liquidity constrained by means of a dynamic binary probit model. We analyze qualitative aspects of the conditions of employment, namely whether the household head is involuntarily overemployed, voluntarily employed, or involuntarily underemployed or unemployed, by means of a dynamic ordered probit model. We focus on the possible interaction between the two types of constraints. We estimate these models jointly using maximum simulated likelihood, where we allow for individual random effects along with an autoregressive process for the general error term in each equation. A novel feature of our method is that it allows for the random effects to be correlated with regressors in a time-invariant fashion. Our results provide strong support for the basic theory of constrained behavior and the interaction between liquidity constraints and exogenous constraints on labor supply. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.953
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 22 (2007)
Issue (Month): 3 ()
Pages: 479-510
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Handle: RePEc:jae:japmet:v:22:y:2007:i:3:p:479-510

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sònia Muñoz, 2006. "Habit Formation and Persistence in Individual Asset Portfolio Holdings: The Case of Italy," IMF Working Papers 06/29, International Monetary Fund. [Downloadable!]
  2. Hajivassiliou, V. & Savignac, F., 2008. "Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects," Documents de Travail 202, Banque de France. [Downloadable!]
  3. Charles GRANT, 2002. "Consumer Bankruptcy Law, Credit Constraints and Insurance: Some Empirics," Economics Working Papers ECO2002/08, European University Institute. [Downloadable!]
  4. António Afonso & Pedro Gomes & Philipp Rother, 2006. "Ordered Response Models for Sovereign Debt Ratings," Working Papers 2006/34, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
    Other versions:
  5. Charles GRANT, 2003. "Evidence on the Effect of US Consumer Bankruptcy Exemptions," Economics Working Papers ECO2003/19, European University Institute. [Downloadable!]
  6. António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers 2006/35, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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