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Research Department Working Papers

Labor Market Effects of Credit Constraints: Evidence from a Natural Experiment

No. 1810 (Revised February 2023)
Anil Kumar and Che-Yuan Liang

Abstract: We exploit the 1997 and 2003 constitutional amendments in Texas—allowing home equity loans and lines of credit for non-housing purposes—as natural experiments to estimate the effect of easier credit access on the labor market. Using state-level as well as micro data and the synthetic control approach, we find that easier access to housing credit led to a 1.2 percentage point average decline in the labor force participation rate between 1997 and 2007. We show that our findings are remarkably robust to improved synthetic control methods based on insights from machine-learning. We also find that declines in the labor force participation rate were larger among females, prime age individuals, the college-educated and homeowners. Our research shows that negative labor market effects of easier credit access should be an important factor when assessing its stimulative impact on overall growth.


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