Household Debt Composition and Labor Market Outcomes

Nelson Camanho, Toni Santos, Jesús Gorrín and Bernardo Ricca

No 616, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: How does the composition of personal debt affect job search outcomes? This paper investigates the impact of household debt levels and composition at the time of mass layoffs on job search duration and post-reemploymentwage growth. Using a comprehensive dataset that links personal debt to the employment histories of all formal workers in Brazil, we find that both the level and type of debt significantly shape job search behavior. In line with the theory of debt overhang, workers with high levels of non-collateralized, wage-linked debt are less likely to find new employment but secure higher wages upon reemployment. In contrast, the negative effects areweaker forworkers with collateralized mortgage debt. Overall, our findings underscore the critical role of personal debt structure in shaping labor market dynamics.

Date: 2025-02
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