Finance and Economics Discussion Series (FEDS)
December 2025
The Effect of Liquidity Constraints on Labor Supply: Evidence from Interest Rate Ceilings
Kabir Dasgupta, Brenden J. Mason
Abstract:
We exploit the spatiotemporal variation in US states’ interest rate ceilings on small-dollar loans to identify the effect of liquidity constraints on labor supply. Exogenously-capped interest rates lead to consumers being shut out of the market for cash loans. In response, labor supply increases by approximately 0.4 hours per week. We also find that the propensity to take personal leaves decreases. Labor supply, therefore, is used to overcome financial constraints, but is not the only method: the effect on earnings is less than many small-dollar loans, suggesting that borrowers employ multiple mechanisms to cope with tightened credit conditions.
Keywords: Liquidity Constraints; Labor Supply; Usury; Payday Lending; Credit Rationing; Consumption Smoothing
DOI: https://doi.org/10.17016/FEDS.2025.110
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.