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Compensation of regional unemployment in housing markets

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Author Info
Wouter Vermeulen ()
Jos van Ommeren

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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 hypothesise that workers in high-unemployment regions are compensated in housing markets. Modelling regional unemployment differentials as a consequence of centralised 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. Workers in regions with high unemployment and low per capita income are therefore not necessarily worse off, and regional support programs should take this into account.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Papers with number 57.

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Date of creation: Feb 2006
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Handle: RePEc:cpb:discus:57

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Related research
Keywords: regional unemployment; housing markets; wage curve; compensating differentials; hedonic models; regional policy;

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Find related papers by JEL classification:
R23 - Urban, Rural, and Regional Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
R13 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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