Working Paper: CEPR ID: DP191
Authors: Patrick Minford; Paul Ashton; Michael Peel
Abstract: The paper uses a general equilibrium model of regional labor markets, in which national and local factors interact to determine local wages and unemployment; when mobility between regions is obstructed by rent subsidies and controls, unemployment and wage differentials arise. Because unemployment benefits set a floor beneath the supply price of labor, as these differentials rise, so too does the national unemployment rate (in declining regions unemployment is the major response, in growing regions wages respond predominantly). The hypothesis is tested on United Kingdom regional unemployment data from 1963 to 1979. It is broadly consistent with this data, though there are some problems in pooling the cross-section and time-series variation. If the pooled equation is used as a basis for prediction, then the national unemployment rate would have fallen just under a half of a percentage point in 1979 if all problem regions were to have adopted "best practice" in application of existing Rent Act and council subsidy regulations. If all rent restrictions had been abolished, the reduction in the national unemployment rate in 1979 would have been about four times as large (1.8 percentage points). This estimate, however, is subject to greater uncertainty than the previous one since we are extrapolating well beyond experience in the sample. Nevertheless, effects of this order (no doubt higher today) should be sufficient to motivate political interest in the deregulation of the housing markets.
Keywords: unemployment; regional labor markets; mobility; rent control; housing subsidies
JEL Codes: J64; R23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| housing distortions (R31) | increased unemployment (J65) |
| rent controls and subsidies (R38) | barriers to labor mobility (J61) |
| barriers to labor mobility (J61) | increased unemployment (J65) |
| rent subsidies (R38) | wage differentials (J31) |
| wage differentials (J31) | elevated national unemployment rate (J64) |
| abolishing rent restrictions (R21) | reduction in national unemployment (J68) |
| union power (J51) | exacerbation of unemployment disparities (F66) |
| higher unionization in the north (J51) | reduced labor demand (J29) |
| reduced labor demand (J29) | limits on job creation in the non-union sector (J58) |
| national unemployment rates (J64) | regional unemployment (R11) |
| regional demand (R22) | regional unemployment (R11) |
| transfer payments (H87) | regional unemployment (R11) |