Labour market participation and mortgage related borrowing constraints

Abstract

This paper analyses the relationship between female labour market participation and mortgage commitments in a life-cycle set up. In particular, it examines whether a mortgage qualification constraint has any effect on female labour market participation. This is done by conditioning on the mortgage decision in a labour market participation equation for married women. Endogeneity of the mortgage variable is tested using house price data. Panel data from the British Household Panel Study is used in order to control for unobserved heterogeneity in participation. Summary• This paper analyses the relationship between female labour participation and mortgage commitments in a life-cycle set up for UK households.• It is important to study the relationship between labour supply and mortgagerelated liquidity constraints because housing represents the biggest component of household assets in the UK and because of the existence of an explicit constraint related to labour income when the mortgage is taken out.• The data used are from the British Household Panel Survey for the years 1993-2000, and the working sample is made of women aged 25-40, in couples, whose husband works full-time. Self-employed individuals and renters are excluded from the analysis.• Estimation is performed by means of a fixed effect logit model, which means that individual unobserved heterogeneity can be controlled for without imposing any structure on the correlation between this and the explanatory variables. In this specific context, it is important to allow individual preference towards work to be correlated with mortgage decisions.• It is found that mortgage commitments, as captured by the ratio between monthly mortgage payment and household income excluding female's earned income, have a positive effect on female participation, at least up to age 34. However, the negative effect on female participation of having a young child is very strong and the combined effect of children and mortgage commitments on participation can stay negative.

Why do home owners work longer hours?

“…This increase is particularly marked for the low educated, and each of the low education cohorts shows an increase in home ownership during the early years of our data (the 1980s). 5 This increase over time is not evident when we plot the combined proportion of households owning or in government housing 6 (the dashed lines), indicating a transfer over time from government housing to owner occupation. In fact, in the 1980s many tenants who rented government housing were given the opportunity to buy their homes, often at below market prices (the so-called "right-to-buy" policy).…”

“…1 Among homeowners aged less than 45, housing assets represented 89% of non-pension assets but the value of outstanding mortgage debt was equal to more than half of gross housing wealth. The interaction between these mortgage commitments and labour supply behaviour has been studied by Fortin (1995), Del Boca and Lusardi (2003), and Bottazzi (2007) for home-owners in Canada, Italy, and the UK respectively. They each show that women in households with greater mortgage commitments are more likely to participate in the labour force and/or work longer hours.…”

“…To address these, both Fortin (1995) and Bottazzi (2007) test for the endogeneity of mortgage payments to the labour supply decision, the latter using panel data to also control for unobserved heterogeneity, but neither finds this endogeneity to be important. Similarly, Del Boca and Lusardi (2003) find only a small effect of the propensity to participate in the labour market on the likelihood of having a mortgage in a simultaneous equation model.…”

Housing Wealth and Household Portfolios in an Ageing Society

“…Doling and Horsewood (2003) present suggestive evidence that owner-occupiers -especially when they are outright owners -indeed tend to reduce their labor supply. This is confirmed by the in-depth analysis of Bloemen (2007), 25 Other recent studies include Bottazzi (2004), who finds smaller effects on participation than Fortin (1995), and provisional exercises reported in an unfinished working paper of Attanasio et al (2005b), which suggest that the labor-market effects of mortgage borrowing constraints are small. who finds a significant positive effect of housing wealth on the job exit rate to early retirement and a significant negative effect of mortgage debt.…”

Does Household Debt Influence the Labor Supply and Benefit Claiming Decisions of Older Americans?

“…Bottazzi (2004) finds significant effects of the mortgage qualification constraint on female labor market participation in Britain, while Del Boca and Lusardi (2003) find similarly strong effects of mortgages on women's labor market participation in Italy. A more recent study by Rossi and Trucchi (2012), which uses various definitions of liquidity constraints, also finds significant impacts of credit rationing on actual and desired labor supply in Italian households.…”