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The roots of structural unemployment
English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of unionization don't explain unemployment nearly as well as the tendency to own houses. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.
Tim Harford has more.
Posted by Tyler Cowen on March 17, 2007 at 01:20 PM in Economics | Permalink
Comments
Are you trying to be droll? Renting a house means you must have a source of funds to pay the rent. Once you own a home outright, you have a major expense off your back and thus may be able to afford to be unemployed.
Posted by: squik at Mar 17, 2007 1:58:24 PM
I imagine so few people own their homes outright that it would barely affect the argument.
Posted by: me at Mar 17, 2007 2:47:56 PM
What paper discusses this?
I looked at several of his papers and could not find this issue.
I suspect there is something about demographics that generates these results.
Probably the individual that has the most trouble finding a new job
is a laid off 55 year old homeowner. But is this because the individual
is a homeowner or because they are 55? Conversely, a 25 year old renter
probably finds a new job much quicker. But is this because they or a
renter or because they are 25?
Posted by: spencer at Mar 17, 2007 3:02:54 PM
squik: I believe the study is referring to *involuntary employment*, not retirement. That is, they want a job at prevailing wages but can't get one. What does that have to do with lacking an expense?
spencer: When you refer to difficulties find a job due to being 55, are you referring to the defined benefits pension that would attach if a company hired them? Or some other unemployable attribute that attaches to being 55?
Because if it's the former, just say that instead of "being 55".
Posted by: Person at Mar 17, 2007 3:07:28 PM
There are a whole host of reasons why a 55 year old will have more difficulty and I had not even considered the pension factor.
Basically I was thinking more of the factor that the 55 year old will be looking for a senior position using their experience that pays much more while the 25 year old will be looking for a lower paying job and does not have so much embedded capital that he will try to earn a return on. For example, a 55 year old aerospace engineer will be looking for something that will use his education and experience in aerospace while the 25 year old will not be looking for such a narrowly defined job category and is much more willing to change fields even if they have a narrow formal education--as an aerospace engineer for example.
Moreover, the job structure is like a pyramid so that the higher you go the smaller and smaller the number of jobs become. Consequently, the 55 year old with higher pay expectations will just find fewer job opportunities then the 25 year old with lower expectations-- or in economic terms a lower reservation wage. I do not know what the current data is, but headhunters have always had a rule of thumb that the higher the salary the longer the job search.
In general, doesn't the switch to defined benefits means that the pension issue is becoming less and less significant over time?
Posted by: spencer at Mar 17, 2007 3:28:25 PM
spencer: I can't speak for the more general point, but I happen to work at an aerospace company, and 55+-year olds neither always expect, nor are always expected to be in a more senior mangerial role. Rather, they typically become contractors with high hourly pay and no benefits. I'd say they're roughly in the position of the "hopping around" 25-year-old renter. They change jobs a lot due to better offers.
In any case, though, speaking of what roles such a person would "look for" blurs the definition of "unemployment". Generally, the sense it is typically used is *involuntary* unemployment. If I can't find the same job that a friend of mine, who recently graduated from the same college, got, is that "involuntary unemployment"?
In general, doesn't the switch to defined benefits means that the pension issue is becoming less and less significant over time?
I assume you mean defined contribution, and yes, thankfully, but there's still health care. I say "thankfully" because it's ridiculous to be turned down for a job because your employer has to pay your compensation as one non-cash benefit. I mean, what happened to all the complaints about being paid in company tokens?
Posted by: Person at Mar 17, 2007 3:51:17 PM
This would seem obvious if one remembers that high-cost areas have both lots of renters and are likely to have lower levels of unemployment. All this study correlates to is the fact that cheap areas with fewer renters are areas without much economic activity.
Posted by: Foobarista at Mar 17, 2007 4:51:49 PM
I just pulled aerospace out of thin air. But the 55 year old does not have to
be in management to have more embedded capital -- experience -- that makes them believe they are more valuable and so have a higher reservation wage. Actually, engineering is probably a poor profession to use as an example of my point because often in technical jobs a more recent degree can make an individual more valuable. Something like sales would probably be a better example where formal education is much less important then experience.
Yes, you are right I meant defined contribution -- the hardest thing in the world is to edit your own writing.
I just read the Mark Thoma treatment of this study and saw what Oswald was talking about. That is why I first asked what article. I still suspect that he is finding correlation without much causation. Does continental Europe have depressed cities like Detroit and Manchester?
Y
Posted by: spencer at Mar 17, 2007 5:27:25 PM
So a policy prescription to reduce unemployment would be to reduce the cost of buying and selling homes?
For example, eliminating stamp duty on home purchases. (That is if you have stamp duty in the U.S.)
Posted by: Ronald Brak at Mar 17, 2007 5:53:17 PM
This would seem obvious if one remembers that high-cost areas have both lots of renters and are likely to have lower levels of unemployment. All this study correlates to is the fact that cheap areas with fewer renters are areas without much economic activity.
I think Foobarista nailed it. This is another case of attempting to imply causation where only correlation exists.
Posted by: tommy at Mar 17, 2007 7:00:35 PM
Obviously the unemployed buy houses because they have the leisure time to improve and decorate them. No-one would bother improving a rented house.
Posted by: dearieme at Mar 17, 2007 8:20:39 PM
I'd say a good rule of thumb wrt public policy is to not enact policy prescriptions until after the mechanism is thouroughly understood.
Posted by: yoyo at Mar 17, 2007 8:51:56 PM
I'm 56. I own my home outright. I have a specialized technical telecom skill which pays pretty well when I'm needed, and I spend about a quarter of my time unemployed. My wee wifey works in health care, and thus gets excellent benefit coverage for the two of us.
Posted by: triticale at Mar 17, 2007 11:17:47 PM
Basing policy on rates of unemployment would be a mistake, because it would start from the position that unemployment is an absolute bad. It's not, poverty is. If you concentrate on reducing unemployment at any cost, and achieve a society of poor people with no shortage of low wage jobs, you may count your mission a success, while I would count it a misguided mission.
Posted by: derek at Mar 18, 2007 5:54:54 AM
"But is this because the individual
is a homeowner or because they are 55? Conversely, a 25 year old renter
probably finds a new job much quicker. But is this because they or a
renter or because they are 25?"
Good point, but I hope they would have adjusted for demographics.
Posted by: josh at Mar 18, 2007 9:34:09 AM
Tyler,
Human beings are not pinballs - they like to put down roots.
Once they put down roots, they do things like, say, raise families. Grow carrots in their gardens. Paint their houses. Clean their yards. Join the PTA. Run for the City Council.
History of civilisation - ten millenia. History of settlements - ten millenia.
History of economics - 230 years.
I'm afraid this is just another instance where the interests of society and the opinions of those who claim to be economic experts are at odds.
In this case, the people know more than the economists.
Power to the people...
Posted by: Martin at Mar 18, 2007 12:41:10 PM
Some UK conservative think tank did a study 20 years ago that showed that voting for parties of the right correlated very highly with home and car ownership, and as a result the Thatcher government gave away a lot of houses and discouraged public transport, and now the UK has a permanent majority of right wing voters...
It may be that when most voters are home and asset owners they tend to vote for parties of the right who don't care that much, or wors, about unemployment, or underemployment.
Consider the UK 20 years later, today: the government is so keen on protecting the interests of middle aged or retired home and asset owners (which are the majority of voters) that it has adopted policies designed to harm low end salaries and raise unemployment of the young.
Then as others have pointed out home owners tend to find it harder to get jobs as they are middle aged, and also have less urgency to do so as they don't need to pay rent and have savings to tide them over.
Posted by: Blissex at Mar 18, 2007 2:17:26 PM
"History of civilisation - ten millenia. History of settlements - ten millenia.
History of economics - 230 years. "
This is simply idiotic. Arguing in this vein, I could point out that humans were nomadic hunter-gatherers for many more millenia, so we should give up on the idea of permanent shelter altogether, and it would be stupid, but still not quite as stupid as this argument.
And as for the moronic anti-economics argument, we've had houses for longer than we've had computers. Does this mean we shouldn't use computers in the design and engineering of houses?
I think people should read the paper and maybe they'd offer more informed critiques, or, you know, actually learn something rather than dismiss something they don't want to bother to understand.
But it does seem to cut both ways. I'm sure ownership may reduce labor supply for the middle-aged, but may also make people less geographically mobile.
Posted by: Keith at Mar 19, 2007 12:42:38 AM
Keith,
"This is simply idiotic. Arguing in this vein, I could point out that humans were nomadic hunter-gatherers for many more millenia, so we should give up on the idea of permanent shelter altogether, and it would be stupid, but still not quite as stupid as this argument."
Play the ball, son, not the man.
The argument is not anti economics; but it is most certainly anti-economist.
Posted by: Martin at Mar 19, 2007 3:48:28 AM
Does anyone know where this Oswald cite is? I have yet to find it. It seems that spencer is correct in that our "idea" of unemployment doesn't match the actual meaning of unemployment. If the spirit of unemployment is simply seeking work, than this result would be expected. Perhaps including those with jobs, but still seeking employment, into the unemployment statistic would be benificial. This would be the actual structural unemployment, at least in spirit.
Posted by: LaPalm at Mar 19, 2007 1:38:28 PM
The data probably should show that more ownership in homes will correlate to higher unemployment. Once most people dive into the ownership in a home they tend to root themselves into that area for a few years. If people are renting out a place it is much easier to relocate quickly and not have too many problems. If an unemployed worker is renting it only makes sense that it will be easier for them to find a job they want and be capable of moving to get the job.
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