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Unemployment and Liquidity Constraints

  • Vassilis A. Hajivassiliou
  • Yannis M. Ioannides

    ()

In this paper we propose a modelling approach for labor supply and consumption decisions that is firmly grounded within a utility maximizing framework and allows for a role of such institutional constraints as limited access to borrowing and involuntary unemployment. We report estimates for a system of dynamic probit models with data from the Panel Study of Income Dynamics. These estimations test broad predictions of the theoretical model. One of our models describes a household's propensity to be liquidity constrained in a given period. The second is a dynamic ordered probit model for a labor constraint indicator describing qualitative aspects of the conditions of employment, that is whether the household head is involuntarily overemployed, voluntarily employed, or involuntarily underemployed or unemployed. These models are estimated separately as well as jointly. Our results provide strong support for the basic theory of constrained behavior and the interaction liquidity constraints and exogenous constraints on labor supply.

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Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 9925.

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Date of creation: 1999
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Handle: RePEc:tuf:tuftec:9925
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Web page: http://ase.tufts.edu/economics

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  26. Borsch-Supan, Axel & Hajivassiliou, Vassilis A., 1993. "Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models," Journal of Econometrics, Elsevier, vol. 58(3), pages 347-368, August.
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  33. Dean R. Hyslop, 1999. "State Dependence, Serial Correlation and Heterogeneity in Intertemporal Labor Force Participation of Married Women," Econometrica, Econometric Society, vol. 67(6), pages 1255-1294, November.
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