Unaffordable Housing and Local Employment Growth

High housing prices have caused concerns among policy makers as well as the public in many U.S. regions. There is a general belief that unaffordable housing could drive businesses away and thus impede job growth. However, there has been little empirical evidence that supports this view. In this paper, we clarify how housing affordability is linked to employment growth and why unaffordable housing could negatively affect employment growth. We empirically measure this effect using data on California municipalities and U.S. metropolitan areas and counties. It is argued that for various reasons a simple correlation between unaffordable housing and employment growth should not be interpreted as causal. We therefore develop some empirical strategies and employ statistical techniques to estimate the causal effect of unaffordable housing on employment growth. Our results provide consistent evidence that indeed unaffordable housing slows growth in local employment. We discuss policy implications of these findings. _____________________________________________ This paper was completed when Dr. Zhang, an assistant professor of economics at Clark University, was a visiting scholar at the New England Public Policy Center at the Federal Reserve Bank of Boston. Ritashree Chakrabarti is a consultant at IHS Global Insight. The authors thank Nate Baum-Snow, Eric Brunner, and Vernon Henderson for stimulating discussions on this topic. This paper has also benefitted from comments by John Brown, Jackie Geoghegan, Jed Kolko, Gunther Maier, Alicia Sasser, Jenny Schuetz, Jeff Zabel, and seminar/conference participants at AIER, Boston Fed, Clark, UMass Dartmouth, the Econometric Society Summer Meetings, the North American Meetings of the RSAI, and the 2010 ASSA Meetings. The views expressed in this paper are solely those of the author and do not necessarily reflect those of the Federal Reserve System or the Federal Reserve Bank of Boston. The New England Public Policy Center was established by the Federal Reserve Bank of Boston in January 2005. The Boston Fed has provided support to the public policy community of New England for many years; the Center institutionalizes and expands on this tradition. The Center's mission is to promote better public policy in New England by conducting and disseminating objective, high-quality research and analysis of strategically identified regional economic and policy issues. When appropriate, the Center works with regional and Bank partners to advance identified policy options. You may learn more about the Center by contacting us or visiting our website: New England Public Policy Center Federal Reserve Bank of Boston P.O. Box 55882 Boston, MA 02205 Phone: (617) 973-4257 E-mail: [email protected] Web: http://www.bos.frb.org/economic/neppc/index.htm