Working Paper

The Effect of Liquidity Constraints on Labor Supply: Evidence from Interest Rate Ceilings

Abstract: We exploit the spatiotemporal variation in US states’ interest rate ceilings on small-dollar loans to identify the effect of liquidity constraints on labor supply. Exogenously-capped interest rates lead to consumers being shut out of the market for cash loans. In response, labor supply increases by approximately 0.4 hours per week. We also find that the propensity to take personal leaves decreases. Labor supply, therefore, is used to overcome financial constraints, but is not the only method: the effect on earnings is less than many small-dollar loans, suggesting that borrowers employ multiple mechanisms to cope with tightened credit conditions.

JEL Classification: D15; G23; G50; J22;

https://doi.org/10.17016/FEDS.2025.110

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2025-12-22

Number: 2025-110