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Compensation of Regional Unemployment in Housing Markets

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Author Info
Wouter Vermeulen () (CPB Netherlands Bureau for Economic Policy Analysis, The Hague)
Jos van Ommeren () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

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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 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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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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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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    Other versions:
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