By Marcus Mølbak Ingholt
Geographical mobility correlates positively with house prices and negatively with unemployment over the U.S. business cycle. I present a DSGE model in which declining house prices and tight credit conditions impede the mobility of indebted workers. This reduces the workers’ cross-area competition for jobs, causing wages and unemployment to rise. A Bayesian estimation shows that this channel more than quadruples the response of unemployment to adverse housing market shocks. The estimation also shows that adverse housing market shocks caused the decline in mobility during the Great Recession. Absent this decline, the unemployment rate would have been 0.5 p.p. lower.
I have always been apprehensive about the policy recommendation to favor owner occupied housing. Think of the admittedly extreme example of Flint, Michigan, where workers lost their jobs when the factories closed and lost their assets as local house prices fell. It became impossible for them to move as they cannot afford housing elsewhere. This paper shows that this issue is no to be neglected in an aggregate way either, as it generates serious geographic miss-allocations of labor.