The Credit Market Consequences of Job DisplacementNational Poverty Center Working Paper #09-08 (2009)
AbstractThis paper demonstrates the important role of job displacement in the household bankruptcy decision. I develop a dynamic, forward-looking model of unemployment and bankruptcy where persistent negative income shocks increase a household's likelihood of filing for bankruptcy both immediately and in the future. Consistent with the model's predictions, I find that households in the NLSY are four 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. Aggregate patterns in job loss and bankruptcy are also consistent with the micro model. Using county-level data from the U.S. Courts and County Business Patterns, I find that 1000 job losses are associated with 8-11 bankruptcies, that the effects also last two to three years, and that the loss of a manufacturing job is three times more likely to lead to bankruptcy than the loss of a non-manufacturing job. The results suggest that while current bankruptcy law requires credit counseling at the time of bankruptcy, providing counseling to vulnerable households at the time of job loss may be more effective.
Publication DateJuly, 2009
Citation InformationBenjamin J. Keys. "The Credit Market Consequences of Job Displacement" National Poverty Center Working Paper #09-08 (2009)
Available at: http://works.bepress.com/benkeys/11/