Does Homeownership Make Workers More Resilient After Economic Shocks?

During the Great Recession, workers around the globe unexpectedly lost their jobs due to large-scale layoffs and firm bankruptcies. The factors that led to their loss of employment were often unrelated to the individual. However, what happened afterward — whether they found new employment, what wage they accepted if they found it, and what distance they had to commute to obtain it — was determined by their personal standards and the financial obligations they faced in the moment. In some cases, they took up jobs based on seemingly insignificant factors such as whether they rented or owned their home.

A recent study by Jordy Meekes and Wolter H.J. Hassink examines how an individual’s housing situation may impact his or her employment outcomes after an unexpected job loss. Using Dutch administrative data, the authors track individuals who lost their jobs due to firm bankruptcies during the years 2007–2011. They focus on how homeownership and the degree of leverage impact these individuals’ employment status, wages, commuting distances, and household relocation choices in the 36 months following their termination. All studied individuals had worked for at least three years prior to their firm’s bankruptcy, and their outcomes are compared to similar individuals whose firms were not dissolved.

Predictably, the authors find that Dutch workers who lose their jobs experience significant and long-lasting harm on their employment and income prospects. Three years after their initial job loss, displaced workers remain 25 percent less likely to be employed than workers who have not been displaced. Those who find new employment suffer a 6 percent decline in wages and commute three kilometers farther, a 20 percent increase on average. However, they are marginally less likely than non-displaced workers to relocate to find better opportunities, perhaps because the uncertainty of finding work in a new location does not justify the additional financial burden of a move.

Homeownership explains a big part of the effect of a job loss on future employment, wages, and commuting distance. Displaced homeowners whose mortgages are underwater are 7 percentage points more likely to find new employment after three years than renters. However, the new jobs pay 1.6 percent less than the new jobs found by renters, reflecting greater urgency to find work, even for a lower wage. Among those homeowners whose homes are not underwater, a higher loan-to-value ratio, indicating greater leverage, is associated with an increased probability of finding work, but a decrease in average wage. On the other hand, individuals who own their homes outright are the least likely to find new jobs, perhaps because they face less pressure to accept jobs with lower wages. Outright owners who find new jobs commute farther to get to work but do not suffer a significantly different loss in wages, relative to renters.

Some peculiarities of the Dutch housing market likely contribute to these results. Unlike in the United States, mortgage loans in the Netherlands are full recourse loans, meaning that borrowers are unable to strategically default. American job losses are more likely to lead to foreclosure, especially for homeowners with negative home equity. Stringent loan obligations may contribute to the geographic immobility of Dutch workers. The nation’s small geographic size may also contribute to low rates of household relocation. However, many of the other outcomes observed by the study are likely to apply outside of the Netherlands.

To better support workers who have suffered a job loss, it is critical that policymakers understand how workers react to these losses. Individuals can increase their likelihood of finding a new job by accepting a lower wage or a longer commute or by relocating to an area with better opportunities. Whereas highly leveraged homeowners may have little option but to take what employment they can find to keep making mortgage payments, renters and those who owned their homes outright have somewhat more flexibility. Policies such as increased unemployment benefits for those trapped by their mortgages may ease the burden of housing payments while these individuals seek new employment, preventing them from suffering long-term wage declines. By considering the ways that housing impacts individual employment decisions, support can be better tailored to the personal factors at play.

Article source: Meekes, Jordy, and Wolter H.J. Hassink. “The Role of the Housing Market in Workers’ Resilience to Job Displacement after Firm Bankruptcy.” Journal of Urban Economics 109 (2019): 41–65.

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