Norges Bank

Working Paper

Household leverage and labor market outcomes

Evidence from a Macroprudential Mortgage Restriction

Author:
Gazi Kabaş and Kasper Roszbach
Series:
Working Paper
Number:
14/2021

Does household leverage matter for worker job search, matching in the labor market, and wages? Theoretically, household leverage can have opposing effects on the labor market through debt-overhang and liquidity constraint channels. To test which channel dominates empirically, we exploit the introduction of a loan-to-value ratio restriction in Norway that exogenously reduces household leverage. Focusing on a sample of displaced workers who bought a house before losing their jobs due to mass layoffs, we find that a reduction in leverage raises the subsequent wages of these workers. Lower leverage enables workers to search longer, find jobs in higher-paying firms, and switch into new occupations and industries. The positive effect on wages is persistent and more pronounced for young and highly-educated workers who are more likely to benefit from the effects of a reduction in leverage on job search. Our results indicate that in addition to reducing financial stability risks, policies limiting household leverage can improve workers’ labor market outcomes.

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ISSN 1502-8190 (online)

Published 6 December 2021 12:30
Published 6 December 2021 12:30