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Labour Force Participation and Household Debt

  • Rochelle Belkar

    (Reserve Bank of Australia)

  • Lynne Cockerell

    (Reserve Bank of Australia)

  • Rebecca Edwards

    (Reserve Bank of Australia)

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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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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  1. Renata Bottazzi, 2004. "Labour market participation and mortgage related borrowing constraints," IFS Working Papers W04/09, Institute for Fiscal Studies.
  2. Verbeek, M.J.C.M. & Nijman, T.E., 1990. "Testing for selectivity bias in panel data models," Discussion Paper 1990-18, Tilburg University, Center for Economic Research.
  3. 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.
  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. Fortin, Nicole M, 1995. "Allocation Inflexibilities, Female Labor Supply, and Housing Assets Accumulation: Are Women Working to Pay the Mortgage?," Journal of Labor Economics, University of Chicago Press, vol. 13(3), pages 524-57, July.
  6. Nijman, T.E. & Verbeek, M.J.C.M., 1992. "Testing for selectivity in panel data models," Other publications TiSEM 7ec34a6c-1d84-4052-971c-d, Tilburg University, School of Economics and Management.
  7. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
  8. 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.
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