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Relative Value vs Absolute Value: Housing Wealth and Labor Supply

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Abstract

Whether household wealth affects labor market behavior is an important empirical question in economics. As the literature only discusses the effect of the absolute value of housing wealth on homeowners’ labor supply, this paper studies how a homeowner’s relative housing wealth—i.e., perceived housing wealth gain compared with their reference group-affects labor market behavior. Using China’s housing boom as a natural experiment, we first construct homeowners’ reference housing wealth using the hedonic method and then estimate the effect of homeowners’ relative housing wealth on labor supply. Subsequently, we identify a causal effect of relative housing wealth on homeowners’ labor supply using an instrumental variable approach and find that an appreciation in relative housing wealth does not significantly influence homeowners’ employment, but significantly reduces their working hours. Our results show that this reduction in working hours is mainly driven by female homeowners. Our results also suggest that the effects of relative housing wealth vary across educational backgrounds, marital statuses, and locations. We find that the effect is more pronounced for female homeowners who are less educated, married, and living in rural areas. Moreover, a set of robustness checks corroborates the validity of our identification strategies and tests the sensitivity of the results.

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Notes

  1. The absolute value of a homeowner’s housing wealth denotes the homeowner’s self-reported housing value or (estimated) market housing value, which is widely used in previous studies (Johnson, 2014; Fu et al., 2016; Disney & Gathergood, 2018).

  2. Similar relative measurements have been used in studies across a broad range of economic literature, including relative wage (Akerlof, 1982; Summers, 1988; Akerlof and Yellen, 1990; McBride, 2001), relative wealth concerns (Abel, 1990; Gali, 1994), and relative performance (Murphy, 1999, 2000).

  3. In China, the regular work day is 8 hours.

  4. Summers (1988) emphasizes the role of relative wages in labor market outcomes. Bracha et al. (2015) conduct a laboratory experiment and find that relative wages significantly affect labor supply.

  5. Agarwal (2007) adopts a unique US data set and finds that ex ante, homeowners who rate (cash-out) refinance an existing loan to increase savings (consumption) are significantly more likely to underestimate (overestimate) their house value, and overestimators (underestimators) are more likely to increase (reduce) their spending ex post. Campbell and Cocco (2007) use UK micro-data and find a positive relationship between housing wealth and consumption. Yang and Wang (2012) show a negative relationship between housing wealth and consumption using data from Sweden. Mian et al. (2013) suggest that housing wealth positively affects consumption in the US. Dong et al. (2017) find that the housing price has a wealth effect and a substitution effect on consumption in China and show that the wealth effect is significant if the housing price-to-income ratio is below 5.0882 and the indicator of financial development is above 1.8827. They also find that the substitution effect will become dominant if the housing price-to-income ratio lies between 5.0882 and 5.9625.

  6. Please refer to Chen and Wen (2017) for details.

  7. The calculation of reference housing wealth will be discussed in Section “Hedonic Analysis”.

  8. The CHNS has no information on transaction prices for homeowners’ properties. Self-reported housing wealth is the only homeowner’s housing value in the survey.

  9. In our dataset, self-reported housing wealth is the same for each member of a household, so household fixed effects can sufficiently alleviate concerns about misestimation of housing wealth.

  10. Housing quality and location are not available in the CHNS data.

  11. According to our dataset, in a typical double-income family the male homeowner’s individual income is about 57.5% of total household income.

  12. The CHNS started to collect home mortgage data in 2009. The relevant variables in the survey are as follows: (1) Do you have a mortgage? (2) What is your monthly payment? (3) What is your down payment? In our sample, only 7.3% of individuals in our sample have home mortgages. Thus, we do not have sufficient information on home mortgages, such as mortgage balance, refinance rate, and cash-out refinance, to perform a rigorous analysis for the effects of home mortgages on labor supply.

  13. According to our dataset, a less-educated homeowner’s individual income is about 54% of a well-educated homeowner’s individual income.

  14. We also investigate the effects of reference and relative housing on other economic behaviors, including early retirement and housewife decision. Results are reported in Appendix Table 11. We find that the coefficient of relative housing wealth is statistically significant for early retirement only in the male sample.

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Acknowledgements

We thank Zan Yang, K.W. Chau, and Seow Eng Ong for their valuable comments and suggestions in the 2018 Asia Pacific Real Estate Research Symposium.

Xiandeng Jiang acknowledges the financial support from the National Natural Science Foundation of China (Grant No. 72104204), and the PRC Ministry of Education Youth Project for Humanities and Social Science Research (Grant No. 20YJC790051). Zheng Pan acknowledges financial support from the Project of Philosophy and Social Sciences of Guangdong Province (Grant No. GD20CYJ17).

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  1. School of Public Finance and Taxation, Southwestern University of Finance and Economics, 555, Liutai Avenue, Wenjiang District, Chengdu, Sichuan, 611130, China

    Xiandeng Jiang

  2. College of Management, Zhongkai University of Agriculture and Engineering, Guangzhou, 510230, China

    Zheng Pan

  3. Institute of Economics and Finance, Nanjing Audit University, No. 86 West Yushan Road, Pukou District, Nanjing, 211815, China

    Ningru Zhao

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Author Xiandeng Jiang has received the financial support from the National Natural Science Foundation of China (Grant No. 72104204), and the PRC Ministry of Education Youth Project for Humanities and Social Science Research (Grant No. 20YJC790051). Author Zheng Pan has received the financial support from the Project of Philosophy and Social Sciences of Guangdong Province (Grant No. GD20CYJ17).

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Appendix

Appendix

Table 10 Definitions of key variables
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Table 11 Effects of reference and relative housing wealth on early retirement and housewife decision
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Jiang, X., Pan, Z. & Zhao, N. Relative Value vs Absolute Value: Housing Wealth and Labor Supply. J Real Estate Finan Econ 66, 41–76 (2023). https://doi.org/10.1007/s11146-022-09904-1

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