The Credit Market Consequences of Job Displacement

This 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. ∗I thank Soren Anderson, Michael Barr, John Bound, Charles Brown, Brian Cadena, Kerwin Charles, Sheldon Danziger, John DiNardo, Jane Dokko, Michael Elsby, David Gunter, Samara Gunter, Patrick Kline, Brian Kovak, Alex Resch, James Sallee, Amit Seru, and participants at the University of Michigan Labor Seminar for helpful comments and suggestions. I am grateful to the Department of Education’s Jacob K. Javits Fellowship program, the University of Michigan’s Rackham Pre-Doctoral Fellowship Program, the Population Studies Center, and the National Poverty Center for generous support. All remaining errors are my own. Website: http://www.umich.edu/∼benkeys. Contact: [email protected].