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

Kumar, Anil; Liang, Che-Yuan

doi:10.24149/wp1810r1

Working Paper

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

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.

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

JEL Classification: E24; E65; J21; R23;

https://doi.org/10.24149/wp1810r1