5 - Borrowing to Address Labor Market Risks

Summary

This chapter focuses on borrowing to address social risks that arise from disrupted employment patterns such as unemployment, sickness, or fluctuating work hours. Within permissive credit regimes, households that are least protected by the welfare state borrow the most. In Denmark, upper-middle- and high-income groups who experience more substantive income losses during unemployment borrow more than low-income groups that are well protected by the welfare state. The limited American welfare state, by contrast, greatly affects low- and middle-income households, which increasingly tap into credit markets to bridge income losses due to fluctuating work hours, temporary employment, and job losses. In Germany, the unemployed rarely borrow money to address financial shortfalls because Germany’s restrictive credit regime makes it very difficult for them to access loans. This chapter demonstrates that political choices affect the relationship between social policies and household debt. Variation in the generosity of unemployment benefits across US states and over time reveals that individuals who become unemployed borrow more in US states where benefits are less generous. The German Hartz labor market reforms show that the significant cuts in social benefits for the long-term unemployed did not increase debt levels for affected households because access to credit remained restrictive.