DP191 The Effects of Housing Distortions on Unemployment

Author(s): Paul Ashton , Patrick Minford , Michael Peel

Publication Date: September 1987

Keyword(s): Housing Subsidies , Labour Markets , Mobility , Rent Control , Unemployment , Unemployment Benefits , United Kingdom , Wages

JEL(s): 122 , 212 , 821 , 824 , 932

Programme Areas: Applied Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP191.asp

The paper uses a general equilibrium model of regional labor markets, in which national and local factors interact to determine local wages and unemployment; when mobility between regions is obstructed by rent subsidies and controls, unemployment and wage differentials arise. Because unemployment benefits set a floor beneath the supply price of labor, as these differentials rise, so too does the national unemployment rate (in declining regions unemployment is the major response, in growing regions wages respond predominantly). The hypothesis is tested on United Kingdom regional unemployment data from 1963 to 1979. It is broadly consistent with this data, though there are some problems in pooling the cross-section and time-series variation. If the pooled equation is used as a basis for prediction, then the national unemployment rate would have fallen just under a half of a percentage point in 1979 if all problem regions were to have adopted "best practice" in application of existing Rent Act and council subsidy regulations. If all rent restrictions had been abolished, the reduction in the national unemployment rate in 1979 would have been about four times as large (1.8 percentage points). This estimate, however, is subject to greater uncertainty than the previous one since we are extrapolating well beyond experience in the sample. Nevertheless, effects of this order (no doubt higher today) should be sufficient to motivate political interest in the deregulation of the housing markets.