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Does High Home Ownership Lead to Higher Unemployment?

That is the surprising question asked (and answered) by David Blanchflower and Andrew Oswald in a new working paper. If this effect is real, and if the mechanisms by which it occurs are true, then this paper is hugely important for policymakers, civic planners, and the rest of us:

We explore the hypothesis that high home-ownership damages the labor market. Our results are relevant to, and may be worrying for, a range of policy-makers and researchers.  We find that rises in the home-ownership rate in a U.S. state are a precursor to eventual sharp rises in unemployment in that state.  The elasticity exceeds unity: a doubling of the rate of home-ownership in a U.S. state is followed in the long-run by more than a doubling of the later unemployment rate.  What mechanism might explain this? We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility, (ii) greater commuting times, and (iii) fewer new businesses. Our argument is not that owners themselves are disproportionately unemployed. The evidence suggests, instead, that the housing market can produce negative ‘externalities’ upon the labor market. The time lags are long. That gradualness may explain why these important patterns are so little-known.

Blanchflower, a Dartmouth economist who regularly writes for the Independent (U.K.), recently published an op-ed in that paper which applied these findings to the European situation:

Unemployment is a major source of unhappiness and mental ill-health.

Yet after a century of economic research, the determinants of unemployment are still imperfectly understood, and unemployment levels in the industrialised nations are around 10 per cent, with some over  20 per cent.

The historical focus of the literature has been on which labour market characteristics – trade unionism, unemployment benefits, job protection, etc – are particularly influential. Contrary to what many on the right have claimed, they aren’t.