Liquidity constraints and family labor participation

This paper sheds light on the relationship between liquidity constraints experienced by the head of the household (HOH) and their family members’ labor supply. The study, focusing on the spillover effects between financial and labor markets, finds that when the HOH is liquidity constrained, unemployed family members join the labor market. While the overall tendency of family members is to choose self-employment versus salaried employment, the results show a heterogeneous impact on different family members. We find the impact of liquidity constraints to be the strongest on the labor market decisions of the spouses and children. Using the China Household Finance Survey (CHFS), the study contributes to the literature by presenting evidence on intra-household risk-sharing from a big emerging market economy where the family ties are tightly knit.