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Labor Market Effects of Credit Constraints: Evidence from a Natural Experiment

Author

Listed:
  • Kumar, Anil

    () (Federal Reserve Bank of Dallas)

  • Liang, Che-Yuan

    () (Uppsala University)

Abstract

We exploit the 1998 and 2003 constitutional amendment in Texas—allowing home equity loans and lines of credit for non-housing purposes—as natural experiments to estimate the effect of easier credit access on the labor market. Using state-level as well as county-level data and the synthetic control approach, we find that easier access to housing credit led to a notably lower labor force participation rate between 1998 and 2007. We show that our findings are remarkably robust to improved synthetic control methods based on insights from machine-learning. We explore treatment effect heterogeneity using grouped data from the basic monthly CPS and find that declines in the labor force participation rate were larger among females, prime age individuals, and the college-educated. Analysis of March CPS data confirms that the negative effect of easier home equity access on labor force participation was largely concentrated among homeowners, with little discernible impact on renters, as expected. We find that, while the labor force participation rate experienced persistent declines following the amendments that allowed access to home equity, the impact on GDP growth was relatively muted. Our research shows that labor market effects of easier credit access should be an important factor when assessing its stimulative impact on overall growth.

Suggested Citation

  • Kumar, Anil & Liang, Che-Yuan, 2018. "Labor Market Effects of Credit Constraints: Evidence from a Natural Experiment," Working Papers 1810, Federal Reserve Bank of Dallas, revised 01 Sep 2018.
  • Handle: RePEc:fip:feddwp:1810
    DOI: 10.24149/wp1810r1
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    File URL: https://www.dallasfed.org/-/media/documents/research/papers/2018/wp1810r1.pdf
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    References listed on IDEAS

    as
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    2. Renata Bottazzi & Serena Trucchi & Matthew Wakefield, 2017. "Labour supply responses to financial wealth shocks: evidence from Italy," IFS Working Papers W17/29, Institute for Fiscal Studies.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Credit Constraints and Labor Supply; Synthetic Control with Machine Learning;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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