Household Liquidity Constraints and Labor Market Outcomes: Evidence from a Danish Mortgage Reform

62 Pages Posted: 13 Nov 2019 Last revised: 6 Aug 2020

See all articles by Alex Xi He

Alex Xi He

University of Maryland - Robert H. Smith School of Business

Daniel le Maire

University of Copenhagen

Date Written: July 31, 2020

Abstract

This paper studies the effects of household liquidity constraints on individual labor market outcomes by exploiting a mortgage reform in Denmark in 1992, which for the first time allowed homeowners to borrow against housing equity for non-housing purposes. We find that following the reform, liquidity-constrained homeowners extracted housing equity, increased debt levels, and had higher earnings growth and lower employment rates. In contrast, the reform had small and opposite effects on the earnings and employment rates of homeowners with high liquid asset holdings. Consistent with models of job search with risk aversion, the option to borrow against housing equity allows liquidity-constrained individuals to search for high-wage jobs. The results imply that relaxing household liquidity constraints during recessions could potentially increase earnings and output in the longer run through labor market search.

JEL Classification: G21, E44, E24, J60, D14, R20

Suggested Citation

He, Alex Xi and le Maire, Daniel, Household Liquidity Constraints and Labor Market Outcomes: Evidence from a Danish Mortgage Reform (July 31, 2020). Available at SSRN: https://ssrn.com/abstract=3481279 or http://dx.doi.org/10.2139/ssrn.3481279

Alex Xi He (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

MD
United States

HOME PAGE: http://www.alexxihe.com/

Daniel Le Maire

University of Copenhagen ( email )

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