Are House Prices Responsible for Unemployment Persistence?
Abstract
The paper analyses the ambiguous role of house prices and housing investment for unemployment dynamics. Whereas traditional models see an increase in house prices as a dynamic multiplier that contributes positively to business cycle swings, the paper considers additional transmission mechanisms via the competitiveness channel (wages) and productivity. As house prices rise, wages tend to follow in order to make up for the loss in real disposable income, which limits employment creation. In addition, with rising house prices, the relative size of the construction sector – a low-productivity industry – tends to increase, lowering aggregate productivity growth, further dampening competitiveness. The paper estimates a stylised dynamic general equilibrium model with unemployment flows. Introducing different transmission mechanisms through which the housing market influences labour and macroeconomic dynamics, the size and direction of the housing market channel is being analysed. The estimation results show that housing shocks can have long-lasting negative effects on employment even though a housing boom can generate a short-lived stimulus on growth and employment. The paper also offers some policy advice simulating housing shocks under different types of structural reforms and macro-prudential regulation.
Keywords
Housing market House prices Unemployment Competitiveness Asset price boomsJEL Classification
J64 J23Notes
Acknowledgements
The authors would like to thank Michael Kumhof, Immo Schott as well as participants at the 7th ReCapNet Conference, a Joint IAB-University of Nuremberg labour market seminar, the 2013 Project LINK meeting and a monthly IMF Labour Market Seminar for very insightful comments. All remaining errors are ours.
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