“Mom, Dad: I’m staying”. Initial labor market conditions, housing markets, and welfare

By Rodrigo Martínez-Mazza

http://d.repec.org/n?u=RePEc:ieb:wpaper:doc2020-14&r=dge

Young individuals are currently living with their parents more than at any other point in time, while also spending more on housing. In this paper, I first show how labor market entry conditions affect housing tenure and affordability in the long term, by using the unemployment rate at the time of graduation as an exogenous shock to income. I perform this analysis across Europe for the last 25 years. Results indicate that a 1 pp increase in the unemployment rate at the time of graduation leads, one year after, to (1) a 1.50 pp increase in the probability of living with parents, (2) a 1.02 pp decrease in the probability of home-ownership and 0.45 pp decrease in renting, and (3) worse affordability. Second, I develop an OLG model to link income shocks for young agents with changes in housing tenure at the aggregate level. I allow for an outside option for landlords which can introduce rigidity into the rental market. Results show that if rental markets are rigid, an income shock to young agents will translate into a larger share of them living with their parents, worse affordability, and larger welfare losses. Finally, I perform a policy exercise based on the French housing aid system. I show that housing aid policies can help to recover welfare losses for young agents, by enabling them to afford to rent. Recognizing the right scenario for the implementation of these policies is key to ensure welfare gains concentrate on the targeted population.

I have so many questions about this paper, mainly about its generalization. Locational preferences are very strong in Europe, thus people tend to stay within the same town. Living with parents is then a possibility. This also constrains the potential jobs. Policies that address these frictions seem to have more potential, but also be more difficult to implement. That said, it looks like the current pandemic could also serve as a reset, as many have interpreted “work form home” as “work from parent’s home.” The post-pandemic equilibrium will not look like the one before because of this lock-in mechanism.

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