Labor Supply as a Buffer: The Implication of Credit Constraints in the US

Muhammad Nawaz, Niraj P. Koirala and Hassan Butt ()
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Muhammad Nawaz: Department of Economics, University of North Carolina Asheville, Asheville, NC 28804, USA
Niraj P. Koirala: Department of Economics and Statistics, California State University Los Angeles, Los Angeles, CA 90032, USA
Hassan Butt: The Robert W. Plaster School of Business, Missouri Southern State University, Joplin, MO 64801, USA

JRFM, 2025, vol. 18, issue 6, 1-21

Abstract: The credit constraint, an example of an incomplete credit market, provides an incentive to intensify the extensive and intensive margins related to labor force participation and work hours, respectively. This study uses the cross-section data from the Survey of Consumer Finance (SCF) and analyzes the impact of credit constraints on labor supply decisions, time to search for employment, and work hours. The empirical findings using the IV-probit and 2SLS models suggest that credit constraints and their various measures encourage households to increase both labor force participation and work hours to offset the negative impact of financial constraints. The intensity of working hours increases when we introduce both the alternate form of credit constraint and various age bands. Credit-constrained individuals effectively search for jobs and are most likely to accept employment in a short period, but their job search process takes more time than non-constrained individuals.

Keywords: household finance; credit constraint; extensive and intensive margins of labor market; instrumental variable (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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