We present a dynamic framework for the interaction between borrowing (liquidity) constraints and deviations of actual hours from desired hours, both measured by discrete-valued indicators, and estimate it as a system of dynamic binary and ordered probit models with panel data from the Panel Study of Income Dynamics. We analyze a household's propensity to be liquidity constrained by means of a dyna... read moremic binary probit model. We analyze qualitative aspects of the conditions of employment, namely whether the household head is involuntarily overemployed, voluntarily employed, or involuntarily underemployed or unemployed, by means of a dynamic ordered probit model. We focus on the possible interaction between the two types of constraints. We estimate these models jointly using maximum simulated likelihood, where we allow for individual random effects along with an autoregressive process for the general error term in each equation. A novel feature of our method is that it allows for the random effects to be correlated with regressors in a time-invariant fashion. Our results provide strong support for the basic theory of constrained behavior and the interaction between liquidity constraints and exogenous constraints on labor supply.read less
This is the peer reviewed version of the following article: Hajivassiliou, Vassilis A. and Yannis M. Ioannides. 2007. "Unemployment and Liquidity Constraints." Journal of Applied Econometrics 22:479-510, which has been published in final form at doi: 10.1002/jae.953. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.