Household Leverage and Labor Market Outcomes Evidence from a Macroprudential Mortgage Restriction

92 Pages Posted: 28 Apr 2021 Last revised: 8 Dec 2021

See all articles by Gazi Kabas

Gazi Kabas

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Kasper Roszbach

Norges Bank - Research Department; University of Groningen - Faculty of Economics and Business

Date Written: December 5, 2021

Abstract

Does household leverage matter for worker job search, matching in the labor market, and wages? Theoretically, household leverage can have opposing effects on the labor market through debt-overhang and liquidity constraint channels. To test which channel dominates empirically, we exploit the introduction of a loan-to-value ratio restriction in Norway that exogenously reduces household leverage. Focusing on a sample of displaced workers who bought a house before losing their jobs due to mass layoffs, we find that a reduction in leverage raises the subsequent wages of these workers. Lower leverage enables workers to search longer, find jobs in higher-paying firms, and switch into new occupations and industries. The positive effect on wages is persistent and more pronounced for young and highly-educated workers who are more likely to benefit from the effects of a reduction in leverage on job search. Our results indicate that in addition to reducing financial stability risks, policies limiting household leverage can improve workers’ labor market outcomes.

Keywords: Household Leverage, Household Debt, Job Displacement, Job Search, Macroprudential Policy.

JEL Classification: E21, G21, G51, J21.

Suggested Citation

Kabas, Gazi and Roszbach, Kasper F., Household Leverage and Labor Market Outcomes Evidence from a Macroprudential Mortgage Restriction (December 5, 2021). Available at SSRN: https://ssrn.com/abstract=3835232 or http://dx.doi.org/10.2139/ssrn.3835232

Gazi Kabas (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

HOME PAGE: http://https://sites.google.com/view/gazikabas/home

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Kasper F. Roszbach

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Groningen - Faculty of Economics and Business ( email )

Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
Netherlands

HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/

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