Assessing House Price Effects on Unemployment Dynamics

We investigate the causal effect of house price movements on unemployment dynamics. Using a dataset of 34 countries over the last 40 years, we show the large and significant impact of house prices on unemployment fluctuations using property taxes as an instrument for house prices. A 10% (instrumented) appreciation in house prices yields to a 3.4% decrease in the unemployment rate. These results are very robust to the inclusion of the variables commonly used to explain unemployment rate developments. If house prices directly impact employment in construction, job volatility in this sector resulting in large employment fluctuations, they impact also total employment through their effects on non-residential investment and consumption, two determinants of labour demand. Housing booms have a specific effect on employment in the tradable sector as they lead to real exchange rate appreciations that affect manufacturing activity.