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

Gazi Kabaş and Kasper Roszbach

No 2021/14, Working Paper from Norges Bank

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 (search for similar items in EconPapers)
JEL-codes: E21 G21 G51 J21 (search for similar items in EconPapers)
Pages: 91 pages
Date: 2021-11
New Economics Papers: this item is included in nep-fdg and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2021_14

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