Searching for flexibility: The Joint Impact of Thatcher’s Reforms of UK Labour and Housing Markets

This paper quantifies the macroeconomic effects of the major housing- and labour-market reforms of the 1980s in the United Kingdom under the Thatcher government. We estimate a small New Keynesian DSGE model with search frictions in both labour and housing markets to evaluate the collapse in public construction, the Right to Buy programme, the decline in trade union bargaining power, and the shift in monetary policy. We find strong cross-market spillovers: housing-market shocks account for roughly half of the volatility in unemployment and job search, and tight housing markets significantly dampen job creation. Counterfactual experiments imply that the observed fall in union bargaining power lowered the mid-1980s unemployment peak by about two percentage points relative to a no-reform path. The housing reforms tilt tenure sharply towards ownership and keep house-price-to-earnings ratios under sustained pressure, but, taken together, the reforms generate only modest changes in average affordability. In welfare terms, the negative effects of lower public construction are more than offset by the combination of lower unemployment and higher housing-service consumption, yielding a net welfare gain of around one per cent in consumption-equivalent terms.