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Breeding Ones' Own Subprime Crisis: The effects of labour market on financial system stability

Daras, Tomasz and Tyrowicz, Joanna (2009): Breeding Ones' Own Subprime Crisis: The effects of labour market on financial system stability.

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Abstract

n this paper we take a simulation approach towards household budgets survey, analysing the impact of changes in labour market status of household members on the ability of this household to service the mortgage payments.

Using the current status as benchmark, we performed simulations using stylised facts about labour market evolutions. Households with mortgage are characterised by higher activity rates and lower unemployment rates than demographically comparable households without a credit. While these are typical preconditions for the credit approval decision, this state of matters may not necessarily persist throughout the entire mortgage service period. Firstly, labour market conditions may worsen in general, comprising the credit takers together with the rest of the population. Alternatively, credit takers may undergo employment experience in the \emph{same way} as other labour market participants.

Consequently, we performed analyses along two scenarios: (i) households with mortgages will gradually become alike the demographically comparable group in terms of employment performance; and (ii) recognising the fact that debtor households members may exert potentially higher effort in maintaining labour market status we model the effects of general employment outlooks deterioration. We use labour force survey data to obtain the probabilities of changing the individual labour market status, while we resort to propensity score matching techniques to provide adequate benchmark for the changes among creditors with relation to general population.

In the simulations we find the share of creditors loosing liquidity with the change in the labour market status and the implied burden to the financial sector stability.

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