CEDE Seminar - Sebastian Montano

Public sector jobs have regulated pay structures that commonly tie wage growth to promotions. This paper leverages novel data and quasi-experimental variation in the allocation of promotions to examine how credit utilization and household labor supply respond to wage increases. We exploit the sharp discontinuity from an exambased promotion policy to compare the outcomes of nearly identical police officers in Colombia before and after they receive a 25 percent pay raise. Four years after promotion, officers accumulate debt for about 160 percent of their annual pay increase. This response is driven by mortgages and personal loans, two types of installment credit. As a result, officers need only one-third of the raise to repay their quarterly financial obligations. Using household data, we show a significant reduction in wives’ employment after their police husbands are promoted. This effect is more pronounced among couples with school-age children, but cannot be explained by changes in fertility decisions. Our findings suggest that households rely on credit instruments to adjust their time and consumption allocation in response to a pay increase.