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Rising House Prices in an Open Labour Market

  • David Duffy

    (Economic and Social Research Institute (ESRI))

  • John FitzGerald

    (Economic and Social Research Institute (ESRI))

  • Ide Kearney

    (Economic and Social Research Institute (ESRI))

In this paper we explore the consequences of the recent steep rise in house prices for the openness of the Irish labour market. Specifically we look at the possible effect rising house prices may have on the migration decision. Since many immigrants are in the household formation age group, and tend to be highly skilled, we argue that the boom in house prices, by reducing the attractiveness of Ireland for potential immigrants, could reduce labour supply. Thus housing emerges as an important infrastructural constraint affecting the labour market. To formulate the role of house prices in the migration decision we use a structural model of the determination of output, labour supply and labour demand in Ireland. We modify the basic model in a number of ways: firstly we endogenise the determination of house prices using structural equations for the demand and supply of housing; secondly we separate out the user cost of housing in the migrant's cost of living index; and thirdly we endogenise the determination of consumer prices. Simulation results suggest that rising house prices, by discouraging potential migrants, could significantly reduce the growth potential of the economy, shifting the balance of labour market growth from employment to wages, with a consequent deterioration in competitiveness. The welfare effects of this differ for different groups; there are unambiguous gains for current home owners while immigrants, first time buyers and those with lower labour market skills are net losers.

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Paper provided by Economic and Social Research Institute (ESRI) in its series Papers with number WP166.

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Length: 22 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:esr:wpaper:wp166
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  1. Alan Barrett & Adele Bergin & David Duffy, 2006. "The Labour Market Characteristics and Labour Market Impacts of Immigrants in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 37(1), pages 1-26.
  2. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  3. Bover, Olympia & Muellbauer, John & Murphy, Anthony, 1988. "Housing, Wages and UK Labour Markets," CEPR Discussion Papers 268, C.E.P.R. Discussion Papers.
  4. John FitzGerald, 1998. "Wage Formation and the Labour Market," Papers WP095, Economic and Social Research Institute (ESRI).
  5. Maurice J. Roche, 1999. "Irish House Prices - Will the Roof Cave In?," The Economic and Social Review, Economic and Social Studies, vol. 30(4), pages 343-362.
  6. repec:esr:forcas:mtr09 is not listed on IDEAS
  7. Kieran McQuinn & Nuala O’Donnell & Mary Ryan, 2005. "Central Bank and Financial Services Authority of Ireland's model," Chapters, in: Econometric Models of the Euro-area Central Banks, chapter 11 Edward Elgar.
  8. FitzGerald, John, 2005. "The Irish Housing Stock: Growth in Number of Vacant Dwellings," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2005(1-Spring), pages 1-22.
  9. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
  10. Roche, Maurice J., 2001. "The rise in house prices in Dublin: bubble, fad or just fundamentals," Economic Modelling, Elsevier, vol. 18(2), pages 281-295, April.
  11. Barrett, Alan & FitzGerald, John & Nolan, Brian, 2002. "Earnings inequality, returns to education and immigration into Ireland," Labour Economics, Elsevier, vol. 9(5), pages 665-680, November.
  12. John Curtis & John FitzGerald, 1994. "Convergence in an Open Labour Market," Papers WP045, Economic and Social Research Institute (ESRI).
  13. Nickell, Stephen & Bell, Brian, 1995. "The Collapse in Demand for the Unskilled and Unemployment across the OECD," Oxford Review of Economic Policy, Oxford University Press, vol. 11(1), pages 40-62, Spring.
  14. Cameron, Gavin & Muellbauer, John, 1998. "The Housing Market and Regional Commuting and Migration Choices," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(4), pages 420-46, September.
  15. Honohan, Patrick, 1992. "The Link between Irish and UK Unemployment," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 1992(1-Spring).
  16. Joshua Gallin, 2004. "The long-run relationship between house prices and rents," Finance and Economics Discussion Series 2004-50, Board of Governors of the Federal Reserve System (U.S.).
  17. Adele Bergin & Ide Kearney, 2004. "Human Capital, The Labour Market and Productivity Growth in Ireland," Papers WP158, Economic and Social Research Institute (ESRI).
  18. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
  19. Stuart A. Gabriel & Janice Shack-Marquez & William L. Wascher, 1990. "Regional house price dispersion and interregional migration," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  20. Barry, Frank & Bradley, John, 1997. "FDI and Trade: The Irish Host-Country Experience," Economic Journal, Royal Economic Society, vol. 107(445), pages 1798-1811, November.
  21. Kenny, Geoff, 1999. "Modelling the demand and supply sides of the housing market: evidence from Ireland1," Economic Modelling, Elsevier, vol. 16(3), pages 389-409, August.
  22. Bergin, Adele & Cullen, Joe & Duffy, David & FitzGerald, John & Kearney, Ide & McCoy, Daniel, 2003. "Medium-Term Review 2003-2010, No. 9," Forecasting Report, Economic and Social Research Institute (ESRI), number MTR09, December.
  23. Kristof Dascher, 2001. "Land Prices, Urban Sprawl and Affordable Housing - Dublin and the Open City," The Economic and Social Review, Economic and Social Studies, vol. 32(1), pages 69-79.
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