Compensation of Regional Unemployment in Housing Markets

TI Discussion Paper No. 05-093/3

25 Pages Posted: 2 Nov 2005

See all articles by Wouter Vermeulen

Wouter Vermeulen

CPB Netherlands Bureau of Economic Policy Research; VU University Amsterdam - Department of Spatial Economics

Jos van Ommeren

Tinbergen Institute; Vrije Universiteit Brussel (VUB)

Date Written: October 2005

Abstract

Why are regional unemployment differentials in Europe so persistent if, as the wage curve literature demonstrates, there is no compensation in labour markets? We hypothesize that workers in high-unemployment regions are compensated in housing markets. Modelling regional unemployment differentials as a consequence of centralized wage bargaining, we show that clearing of land markets may undo the incentive for workers to migrate to low-unemployment regions in general equilibrium. The compensating differentials hypothesis is tested on city-level data for several countries. Controlling for variation in income and amenities, housing is found to be about 3 percent less expensive on average in cities where unemployment is 10 percent up. An analysis of housing demand survey data, which takes account of housing heterogeneity, yields a similar negative relationship. The magnitude of the income effect generated by this compensating differential is consistent with a -0.10 wage curve elasticity. These findings weaken the case for regional support programs.

Keywords: regional unemployment, housing markets, wage curve, compensating differentials, hedonic models, regional policy

JEL Classification: R23, R13, J64

Suggested Citation

Vermeulen, Wouter and van Ommeren, Jos and van Ommeren, Jos, Compensation of Regional Unemployment in Housing Markets (October 2005). TI Discussion Paper No. 05-093/3, Available at SSRN: https://ssrn.com/abstract=833144 or http://dx.doi.org/10.2139/ssrn.833144

Wouter Vermeulen (Contact Author)

CPB Netherlands Bureau of Economic Policy Research ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

VU University Amsterdam - Department of Spatial Economics

De Boelelaan 1105
1081HV Amsterdam
Netherlands

Jos Van Ommeren

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium