The effect of home ownership on unemployment

In an interesting working paper Blanchflower and Oswald (2013) take a look at how home ownership rates may be connected to unemployment. We are pretty much used to thinking of home ownership as a “good” and desirable thing. It is quite often encouraged by governments through subsidies and the like. However, this may have adverse effects.

If you think about it it’s quite intuitive: higher home ownership rates will reduce labor mobility because if you own a house somewhere you will be more reluctant to move. Lower labor mobility will make the labor market less efficient because labor supply will not necessarily follow labor demand in a geographic sense. The result is higher unemployment altogether.

Check out the following chart from the paper, which depicts unemployment on the y-axis and home ownership rate on the x-axis.

homes_unemp_chart

You can clearly see the contrast between nations like Switzerland (30% home ownership, 3% unemployment) and Spain (80% home ownership, 20+% unemployment). The authors actually do not look at cross-country but rather cross-state, time-series data in the United States (from the eighties up to today). They regress unemployment on its lagged value and on lagged home ownership rates (from t-1 to t-5). Furthermore, they control for the presence of trade unions, personal and educational characteristics that usually explain unemployment and state and year dummies.

They also run a bunch of robustness checks such as dividing the data up into two sub-periods or two geographical areas, they also switch unemployment with the employment rate to see if the inverse of the relationship holds there.

Their data is robust to all these checks and what they find basically is that unemployment is positively correlated with lagged home ownership. That is to say, in most cases the home ownership rate of 5 years earlier has a significantly positive effect on current unemployment. (I said “in most cases” because in some of their regressions the 4-year lag is found to be significant instead.)

Home ownership rates lagged only by 1-4 years are usually not significant. The 1-year lagged rate sometimes actually has a negative sign indicating perhaps that when a region is economically booming more people buy homes there.

The authors estimate the long-term elasticity of unemployment with respect to home ownership to be between 1 and 2, which is quite high. This would mean that if home ownership rates rise by let’s say 5%, then unemployment could rise by 5-10% in the long run. This relationship may have been “hidden” so far because of the considerable time lag involved, argue the authors.

Two other related effects of home ownership rates that authors find are that they have a significantly positive effect on commuting times and a negative effect on the number of firms and establishments in a certain area. Longer commute times can make the whole economy function less efficiently (think of traffic congestions). The lower business formation may be attributed to zoning and NIMBY (not in my backyard) effects.

What’s more Laamanen (2013) finds the same thing in Finland. As it happens these two papers were written concurrently and they arrived at much the same conclusions for two different countries. It appears therefore, that home ownership may present a negative externality on the labor market. This is definitely a topic that deserves more research as currently most governments encourage home ownership when perhaps they shouldn’t.

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