Interactions Between Job Search andHousing Decisions: A Structural Estimation

In this paper, we investigate to what extent shocks in housing and \u85nancial mar-kets account for wage and employment variations in a frictional labor market. To explain these interactions, we use a model of job search with accumulation of wealth as liquid funds and residential real estate, in which house prices are randomly persistent. First, we show that reservation wages and unemployment are increasing in total wealth. And, second, we show that reservation wages and unemployment are also responsive to the composition of wealth. Speci-cally, when house prices are expected to rise, holding a larger share of wealth as residential real estate tends to increase reservation wages, which deteriorates employment transitions and increases unemployment. We estimate our model structurally using National Longitudinal Survey of Youth data from 1978 to 2005, and we \u85nd that more relaxed house \u85nancing conditions, in particular lower down payment requirements, decrease employment rates by 5 percentage points in the short run and by 2 percentage points in the long run. We also \u85nd that worse labor market conditions immediately increase homeownership rates by up to 5 percent points, whereas in the long run homeownership decreases by 8 percentage points