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Labor Market Upheaval, Default Regulation, and Consumer Debt

Author

Listed:
  • Kartik Arthreya

    (Federal Reserve Bank of Richmond)

  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

  • Xuan Tam

    (City University, Hong Kong)

  • Eric Young

    (University of Virginia)

Abstract

In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment. By contrast, informal default through delinquency rose sharply. In the subsequent recovery, households have been widely viewed as "deleveraging" (Mian and Sufi 2011, Krugman and Eggertson 2012) via the largest reduction of unsecured debt seen in the past three decades. We measure the relative roles of recent bankruptcy reform and labor market risk in accounting for consumer debt and default over the Great Recession. Our results suggest that bankruptcy reform likely prevented a substantial increase in formal bankruptcy filings, but had only limited effect on informal default from delinquencies, and that changes in job-finding rates were central to both. (Copyright: Elsevier)

Suggested Citation

  • Kartik Arthreya & Juan Sanchez & Xuan Tam & Eric Young, 2015. "Labor Market Upheaval, Default Regulation, and Consumer Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 32-52, January.
    • Handle: RePEc:red:issued:14-30
    DOI: 10.1016/j.red.2014.08.001
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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