PI: Barbara F. Reskin Co-PI: Michelle Maroto Institution: University of Washington
Cumulative disadvantage theory predicts divergence over time between individuals, where one person builds resources, another loses them. This project examines the accumulation of disadvantage by studying the determinants and consequences of bankruptcy. Bankruptcy offers an opportunity to purge previous debt, but it can be a stigmatizing process with later negative outcomes including job and income loss. A model is tested that depicts a cycle of job loss, increased debt, and bankruptcy over time as part of a process of cumulative disadvantage. Two longitudinal datasets are examined: the National Longitudinal Survey of Youth and the Panel Study of Income Dynamics to estimate predictors and outcomes of bankruptcy.
Broader Impacts: A better understanding of the causes and consequences of bankruptcy can aid in its prevention and in the mitigation of adverse consequences after the event.
Although the labor market functions as the primary mechanism for the distribution of income in the United States, credit markets can also enhance, maintain, or reduce economic inequality. Today the credit market continues to contribute to inequality in the United States, which has drawn public attention to corporate growth, the stock market, subprime lending institutions, home foreclosures, and bankruptcy. For purveyors of credit, credit markets increase wealth and the power it confers, but for many borrowers, credit can lead to debt delinquency and even bankruptcy. The legal framework in the United States then reinforces these advantages for creditors and respective disadvantages for debtors within credit markets. In such situations, credit markets act to increase overall inequality, advantaging some at the expense of others. In this dissertation, I focused on bankrupters--one type of extreme debtor--in order to address both the rising importance of credit markets in people’s lives and the interconnectedness of credit and labor markets. I used this case to illustrate the continuing inequalities that exist within the credit market, extend into the labor market, and support a process of cumulative disadvantage. In doing so I also addressed the legal framework that dictates the rules of bankruptcy and calls attention to the ongoing class struggles between creditors and debtors. My research builds on theories of cumulative disadvantage by examining whether, how, and for whom disadvantage is transmitted across markets. Because theories of cumulative advantage and disadvantage predict increasing inequality over time, testing them necessitates a longitudinal analysis. I applied fixed effects models to National Longitudinal Survey of Youth (1979 Cohort; NLSY) and Panel Survey of Income Dynamics (PSID) data to estimate the causes and consequences of bankruptcy. Because I was interested in how credit and labor markets jointly affect inequality I tested a model that depicts a cycle of job loss, increased debt, and bankruptcy over time as part of a process of cumulative disadvantage. Within this dissertation, I first described the multiple adverse events and continuing financial problems that most bankrupters face, as reflected in my two longitudinal datasets. I also addressed variation by bankruptcy chapter and found consistent race gaps that demonstrate the additional disadvantages for black bankrupters. After describing bankrupters, I focused on explaining what leads people into bankruptcy. In this part of my dissertation, I sought to address the Congressional debate regarding whether bankruptcy results more from individual irresponsibility or from personal misfortune. By using fixed effects to control for stable individual-level characteristics, I showed that bankruptcy resulted more from people’s experiences of job loss, illness, and marital dissolution than from any "moral shortcomings" reflected in personality characteristics. Debt burden was also strongly associated with the probability of bankruptcy, but this variable interacted with income, leading to larger effects for low-earners. These findings were particularly true for my cohort of baby boomers, represented in the NLSY data. In the second part of this model of cumulative disadvantage, I addressed the labor market consequences of bankruptcy by investigating what happens after a debtor declares bankruptcy. As I expected, respondents faced additional labor market disadvantages after declaring bankruptcy. In the NLSY, bankrupters generally earned less and spent less time working than they did before bankruptcy, net of unobserved individual characteristics and time-varying employment and demographic control variables. Bankruptcy’s effects also varied by the respondent’s previous earnings, education, and job search status, which indicates that the labor market penalties are not the same for everyone. Because bankruptcy acts a negative credential that is formalized within a person’s credit history, employers’ reliance on credit reports could be a cause of this continuing disadvantage. Although I was unable to explicitly test this mechanism, my methods and the covariates I included helped me to rule out other competing mechanisms, lending more support to the role of credit reports. Taken together, my findings illustrate how certain disadvantages can build for different individuals across markets and over time. Bankruptcy, which often results from adverse events, particularly income losses and unmanageable debt burden, confers a stigmatized status that extends to how people fare in labor markets. This finding demonstrates the importance of a person’s credit market status for later outcomes outside of the credit market. The causes and consequences of bankruptcy, however, occur in the context of a legal framework determined by creditor and debtor class conflict. Creditor-debtor conflict also supports this system of cumulative advantage/disadvantage, as creditors with increasingly greater power are able to exert more influence over the political system than debtors and manipulate the legal framework.
