Open Economies Review

, Volume 29, Issue 4, pp 795–833 | Cite as

Are House Prices Responsible for Unemployment Persistence?

  • Ekkehard Ernst
  • Faten Saliba
Research Article


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.


Housing market House prices Unemployment Competitiveness Asset price booms 

JEL Classification

J64 J23 



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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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Research DepartmentInternational Labour OrganisationGenevaSwitzerland
  2. 2.Department of EconomicsUniversity of ManchesterManchesterEngland

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