Unemployment and Liquidity Constraints

Vassilis Hajivassiliou and Yannis Ioannides

No 1090, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: In this paper we propose a modelling approach for labor supply and consumption decisions that is firmly grounded within a utility maximizing framework and allows for a role of such institutional constraints as limited access to borrowing and involuntary unemployment. We report estimations for a system of dynamic probit models with data from the Panel Study of Income Dynamics. These estimations test broad predictions of the theoretical model. One of our models describes a household's propensity to be liquidity constrained in a given period. The second is a dynamic ordered probit model for a labor constraint indicator describing qualitative aspects of the conditions of employment, that is whether the household head is involuntarily overemployed, voluntarily employed, or involuntarily underemployed or unemployed. These models are estimated separately as well as jointly. Our results provide strong support for the basic theory of constrained behavior and the interaction between liquidity constraints and exogenous constraints on labor supply.

Keywords: Intertemporal optimization; quantity constraints; liquidity constraints; unemployment; dynamic probit models; simulation estimation (search for similar items in EconPapers)
JEL-codes: C33 C35 C61 D91 E24 (search for similar items in EconPapers)
Pages: 49 pages
Date: 1995-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Applied Econometrics (2007), 22(3): 479-510

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Related works:
Journal Article: Unemployment and liquidity constraints (2007)
Working Paper: Unemployment and Liquidity Constraints (1999)
Working Paper: Unemployment and Liquidity Constraints (1995)
Working Paper: Unemployment and Liquidity Constraints (1993)
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