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.