Housing, borrowing constraints, and labor supply over the life cycle
In this work, I show that leverage-based borrowing constraints are important determinants of labor supply withint two-workers households. I focus on two metrics commonly used to judge households’ financial position with respect to mortgage debt: the Loan-to-Value (LTV) and the Loan-to-Income (LTI) ratios. Using data from the UK, I show that, within couples, employment of the secondary earner exhibits a strong positive association with the primary earner’s LTI but not with the LTV. I develop a life cycle model of a two-worker household with idiosyncratic income risk, divisible female labor, and housing. Debt limit are based on maximum levels of LTV and LTI ratios. In the model, young households with high present value of future male earnings use their housing as collateral to accumulate debt and avoid costly female labor supply. Meanwhile, a high male LTI reflects a lower ability to repay housing debt solely through male earnings, leading females to increase labor supply. These mechanisms have important implications for the labor supply response to income and house price shocks and the ensuing welfare costs. The extensive labor margin response of high-LTV households is twice as large as that of low-LTV ones. Due to the tightening of LTV-based borrowing constraints, they also are more sensitive to falls in house prices.
Date: 30 October 2017, 12:15 (Monday, 4th week, Michaelmas 2017)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room B
Speaker: Carlo Pizzinelli (University of Oxford)
Organising department: Department of Economics
Part of: Postdoc & DPhil Workshop
Booking required?: Not required
Audience: Members of the University only
Editors: Erin Saunders, Anne Pouliquen