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

Abstract

We exploit the 1998 and 2003 constitutional amendment 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 notably lower labor force participation rate between 1998 and 2007. We show that our findings are remarkably robust to improved synthetic control methods based on insights from machinelearning. We explore treatment effect heterogeneity using grouped data from the basic monthly CPS and find that declines in the labor force participation rate were larger among females, prime age individuals, and the college-educated. 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.