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

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  • Anil Kumar
  • Che-Yuan Liang

Abstract

We exploit the 1997 and 2003 constitutional amendments 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 micro data and the synthetic control approach, we find that easier access to housing credit led to a 1.2 percentage point average decline in the labor force participation rate between 1997 and 2007. We show that our findings are remarkably robust to improved synthetic control methods based on insights from machine-learning. We also find that declines in the labor force participation rate were larger among females, prime age individuals, the college-educated and homeowners. Our research shows that negative labor market effects of easier credit access should be an important factor when assessing its stimulative impact on overall growth.

Suggested Citation

  • Anil Kumar & Che-Yuan Liang, 2018. "Labor Market Effects of Credit Constraints: Evidence from a Natural Experiment," Working Papers 1810, Federal Reserve Bank of Dallas, revised 04 Feb 2023.
    • Handle: RePEc:fip:feddwp:1810
    DOI: 10.24149/wp1810r3
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    Cited by:

    1. Low, Hamish & Sánchez-Marcos, Virginia, 2024. "Labour supply and the cost of house price booms and busts," Labour Economics, Elsevier, vol. 90(C).
    2. Muhammad Nawaz & Niraj P. Koirala & Hassan Butt, 2025. "Labor Supply as a Buffer: The Implication of Credit Constraints in the US," JRFM, MDPI, vol. 18(6), pages 1-21, June.
    3. Gissur Ó Erlingsson & Jonas Klarin & Eva Maria Mörk, 2021. "Does Size Matter? Evidence from Municipality Break-Ups," CESifo Working Paper Series 9042, CESifo.

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    More about this item

    Keywords

    credit constraints; labor supply; Synthetic control; machine learning;
    All these keywords.

    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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