Household Liquidity Constraints and Labor Market Outcomes: Evidence from a Danish Mortgage Reform |
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| Authors: | ALEX XI HE DANIEL LE MAIRE |
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| Affiliation: | 1. Correspondence: Alex Xi He, 4411 Van Munching Hall, Robert H. Smith School of Business, University of Maryland, College Park, MD 20742;2. e-mail: axhe@umd.edu;3. Alex Xi He is at Robert H. Smith School of Business, University of Maryland. Daniel le Maire is at the University of Copenhagen. An earlier version of the paper was circulated under the title “How Does Liquidity Constraint Affect Wages and Employment? Evidence from Danish Mortgage Reform.” We thank Søren Leth-Petersen for sharing his code and data on housing prices and car registration. We thank Daron Acemoglu, David Autor, Asaf Bernstein, Kyle Herkenhoff, Sasha Indarte, Stephanie Johnson, Søren Leth-Petersen, Pete Kyle, Max Maksimovic, Brian Melzer, Amit Seru (editor), Daphné Skandalis, Geoff Tate, David Thesmar, Liu Yang, and seminar participants at Philadelphia Fed, Western Finance Association, and University of Maryland for helpful suggestions. Support from the Danish Finance Institute (DFI) is gratefully acknowledged. |
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| Abstract: | We study the causal effect of liquidity constraints on individual labor market outcomes by exploiting the 1992 mortgage reform in Denmark, which for the first time allowed homeowners to borrow against housing equity for nonhousing purposes. Following the reform, liquidity-constrained homeowners increased debt levels and had higher earnings growth and lower employment rates. The option to borrow against housing equity enabled liquidity-constrained individuals to move to high-wage jobs and invest in valuable human and physical capital. The results imply that relaxing household liquidity constraints during recessions can create better job matches, potentially increasing earnings and output in the longer run. |
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