Liquidity constraints and labor supply

In this paper we show how liquidity constraints shape Italian house-holds’ decisions with respect to labour supply. One way to neutralize the existence of binding liquidity constraints is simply by supplying additional labor, instead of reducing consumption patterns. We estimate whether resorting to additional labor supply as a smoothing consumption device is at work by using the Survey of Households Income and Wealth (SHIW) and exploiting its panel component. The longitudinal dimension allows to control for state dependence in the labor supply, individual unobserved heterogeneity and the endogeneity of our measure for credit constraints in labor supply equations. Our results show that liquidity constraints increase the intensity in the supply of women’s labor and foster their participation in the labor force. The former effect is at work without time delay, while participation takes more time to adjust to credit constraints.We do not find any significant effect on men’s labor supply.

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