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Compensation of Regional Unemployment in Housing Markets

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  • Wouter Vermeulen

    ()
    (CPB Netherlands Bureau for Economic Policy Analysis, The Hague)

  • Jos van Ommeren

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

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.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-093/3.

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Date of creation: 13 Oct 2005
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Handle: RePEc:dgr:uvatin:20050093

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

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Cited by:
  1. Eric Delattre & Jean-Baptiste Combès & Bob Elliott & Diane Skatun, 2012. "Hospital Staffing and Local Pay: an Investigation into the Impact of Local variations in the Competitiveness of Nurses Pay on the Staffing of Hospitals in France," THEMA Working Papers 2012-35, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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