Interactions between Job Search and Housing Decisions: A Structural Estimation

53 Pages Posted: 23 Jul 2015

See all articles by Sílvio Rendon

Sílvio Rendon

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Núria Quella-Isla

Columbia University - Barnard College

Date Written: July 2015

Abstract

In this paper, we investigate to what extent shocks in housing and financial markets account for wage and employment variations in a frictional labor market. To explain these interactions, we use a model of job search with accumulation of wealth as liquid funds and residential real estate, in which house prices are randomly persistent. First, we show that reservation wages and unemployment are increasing in total wealth. And, second, we show that reservation wages and unemployment are also responsive to the composition of wealth. Specifically, when house prices are expected to rise, holding a larger share of wealth as residential real estate tends to increase reservation wages, which deteriorates employment transitions and increases unemployment. We estimate our model structurally using National Longitudinal Survey of Youth data from 1978 to 2005, and we find that more relaxed house financing conditions, in particular lower down payment requirements, decrease employment rates by 5 percentage points in the short run and by 2 percentage points in the long run. We also find that worse labor market conditions immediately increase homeownership rates by up to 5 percent points, whereas in the long run homeownership decreases by 8 percentage points.

Keywords: Job Search, Housing, Savings, Structural Estimation

JEL Classification: J64, E21, E24, R21

Suggested Citation

Rendon, Silvio and Quella-Isla, Nuria, Interactions between Job Search and Housing Decisions: A Structural Estimation (July 2015). FRB of Philadelphia Working Paper No. 15-27. Available at SSRN: https://ssrn.com/abstract=2634405 or http://dx.doi.org/10.2139/ssrn.2634405

Silvio Rendon (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Nuria Quella-Isla

Columbia University - Barnard College ( email )

3009 Broadway
New York, NY 10027
United States

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