Impact of interest rates and private wealth on labor supply: a study on G7 countries

Abstract

This study examines the impact of interest rates and private wealth on labor supply across the G7 countries using data from 1971 to 2020. It uses a panel data analysis to explore how the changes of these variables influence labor supply, with a particular focus on substitution effect¬ — where labor supply increases as the interest rates rise — and income effects — where wealth accumulation reduces the labor supply. The study uses a Representative Agent New Keynesian (RANK) model to frame the theoretical discourse on the labor supply decisions. In the empirical analysis we considered the possibility of structural break and implemented diagnostic checks for it. The findings postulate insightful results, such as the dominance of the substitution effect in the case of interest rates, and the dominance of income effect when the interest rate was persistently high. Although, there is a statistically significant impact of these variables on the labor supply, the magnitude of these impacts remains modes