Research Discussion Paper – RDP 2007-05 Labour Force Participation and Household Debt Abstract

In the past decade or so there has been a substantial rise in the indebtedness and debt-servicing obligations of Australian households. This has been accompanied by a trend increase in labour force participation (LFP) for women and more recently for men. Microeconomic data show a clear positive correlation between indebtedness and LFP. This paper models the LFP decision of prime-age Australian women and men accounting for the influence of debt and assets along with a range of other variables found to be important in the literature. The potential two-way causation between debt and labour supply is also addressed.

Data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey are used as it contains recent and detailed data on household wealth along with extensive labour market and demographic data. A cross-section model of LFP is estimated using the detailed measures of household debts and assets available in Wave 2 of the survey. In addition, a panel model, using only measures of owner-occupied housing debt and assets, is estimated using all five currently available waves.

Evidence is presented to suggest that LFP is determined by several factors, including family structure, education, health and indebtedness. In general, most of the effect of indebtedness on an individual's probability of participation in the labour force is captured through the household debt-servicing ratio, although the level of owner-occupied mortgage debt appears important for men. Also, the panel results suggest that accounting for unobserved heterogeneity across individuals is important when examining the influence of debt on labour supply.

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