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Labour Force Participation and Household Debt

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  • Rochelle Belkar

    (Reserve Bank of Australia)

  • Lynne Cockerell

    (Reserve Bank of Australia)

  • Rebecca Edwards

    (Reserve Bank of Australia)

Abstract

In the past decade or so there has been a substantial rise in the indebtedness and debt-servicing obligations of Australian households. This has been accompanied by a trend increase in labour force participation (LFP) for women and more recently for men. Microeconomic data show a clear positive correlation between indebtedness and LFP. This paper models the LFP decision of prime-age Australian women and men accounting for the influence of debt and assets along with a range of other variables found to be important in the literature. The potential two-way causation between debt and labour supply is also addressed. Data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey are used as it contains recent and detailed data on household wealth along with extensive labour market and demographic data. A cross-section model of LFP is estimated using the detailed measures of household debts and assets available in Wave 2 of the survey. In addition, a panel model, using only measures of owner-occupied housing debt and assets, is estimated using all five currently available waves. Evidence is presented to suggest that LFP is determined by several factors, including family structure, education, health and indebtedness. In general, most of the effect of indebtedness on an individual’s probability of participation in the labour force is captured through the household debt-servicing ratio, although the level of owner-occupied mortgage debt appears important for men. Also, the panel results suggest that accounting for unobserved heterogeneity across individuals is important when examining the influence of debt on labour supply.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2007-05.

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Date of creation: Jun 2007
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Handle: RePEc:rba:rbardp:rdp2007-05

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Keywords: labour force participation; household debt; credit constraints; HILDA;

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References

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  1. Verbeek, M. & Nijman, T., 1990. "Testing For Selectivity Bias In Panel Data Models," Papers 9018, Tilburg - Center for Economic Research.
  2. Fortin, N.M., 1992. "Allocation Inflexibilities , Female Labor Supply and Housing Assets Accumulation: Are Women Working to Pay the Mortagage," Cahiers de recherche 9204, Universite de Montreal, Departement de sciences economiques.
  3. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
  4. Christopher Worswick, 1999. "Credit Constraints and the Labour Supply of Immigrant Families in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 152-170, February.
  5. Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, vol. 39(3), pages 347-366, November.
  6. Renata Bottazzi, 2004. "Labour market participation and mortgage related borrowing constraints," IFS Working Papers W04/09, Institute for Fiscal Studies.
  7. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-21, May.
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Cited by:
  1. Sarantis Lolos & Evangelia Papapetrou, 2011. "Housing credit and female labour supply: assessing the evidence from Greece," Working Papers 141, Bank of Greece.
  2. Joanna Abhayaratna & Les Andrews & Hudan Nuch & Troy Podbury, 2008. "Part Time Employment: the Australian Experience," Staff Working Papers 0805, Productivity Commission, Government of Australia.
  3. Jeff Borland, 2011. "The Australian Labour Market in the 2000s: The Quiet Decade," RBA Annual Conference Volume, in: Hugo Gerard & Jonathan Kearns (ed.), The Australian Economy in the 2000s Reserve Bank of Australia.
  4. Ellis Connolly & Kathryn Davis & Gareth Spence, 2011. "Trends in Labour Supply," RBA Bulletin, Reserve Bank of Australia, pages 1-8, June.

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