The Credit Market Consequences of Job Displacement

Benjamin J. Keys
2018 Review of Economics and Statistics  
This paper studies the role of job displacement in the household bankruptcy decision. Using an event-study methodology, I find that households in the NLSY are over three times more likely to file for bankruptcy in the year immediately following a job loss. Heightened bankruptcy risk then declines in magnitude but persists for two to three years. These findings are conditional on the financial benefit to filing and consistent with a dynamic forward-looking model where persistent negative income
more » ... hocks increase a household's likelihood of filing for bankruptcy both immediately and in the future. Aggregate patterns in job loss and bankruptcy are also consistent with the micro model. Using county-level data and a shift-share instrument for demand-driven job changes, I similarly find that 1,000 job losses are associated with a tripling of the county bankruptcy rate. In addition, the loss of a manufacturing job, a proxy for a more persistent separation, is 40 percent more likely to lead to bankruptcy than the loss of a non-manufacturing job. The results suggest that unemployment spells can have significant long-term consequences on households' credit market outcomes.
doi:10.1162/rest_a_00709 fatcat:pihzytw4uff7ln66ik2d5c7h2i