Recent European data indicate that countries where a large proportion of the population lives in owner-occupied housing are experiencing higher unemployment rates than countries where the majority of people live in private rental housing, which might suggest that rental housing enhances labor mobility. In this paper, we develop a simple intertemporal two-region model that allows us to compare owner-occupied housing markets to rental markets and to analyze how these alternative arrangements allocate people in space and time. Consistent with the empirical observations, we find that the interregional labor market is more fluid under rental housing than under owner-occupation. As a result of greater mobility, the rental arrangement also results in better allocational efficiency than owner-occupation. When dwellings are rented, the decision to move to a booming region is largely based on current productivity, whereas under owner-occupation random wealth effects encourage deviations from this optimal behavior.
Introduction: Awell-functioning housing market, providing an adequate turnover of residential mobility, is important for the ef¿cient matching of jobs within the labor market. Immobility caused by frictions in the housingmarket can seriously inhibit the ability of the labor market to match vacancies with potential employees. Recently, many European researchers have asked whether the relatively high unemployment rates in countries like the UK and Spain can be explained by the fact that the majority of people in these nations owner-occupy their homes, while a small minority live in commercial rental housing (e.g. Oswald (1999)). This question arises naturally,since the lowest rates of unemployment can be found from such contrasting
countries like Germany and Switzerland where most people live in privately rented homes. A number of microeconometric studies also indicate that home-owners are more sluggish to move in response to changing labor market conditions than people who rent their homes (see e.g. Hughes and McCormick (1985, 1987), Henley (1998), and Gardner et al. (2000)). Despite the importance of the underlying policy questions, there does not yet exist a satisfactory theoretical analysis about the relative merits of owner occupation and rental housing in enhancing interregional mobility of households and labor.
Author: Markus Haavio,Heikki Kauppi
Source: Research Discussion Papers, Bank of Finland
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