The Effect of Housing Market Disequilibrium on the Supply of Labor: Evidence from Poland, 1989-1990

Article excerpt

This paper examines the effect of housing market disequilibrium on the supply of labor. Earlier studies suggested that housing market disequilibria affected other markets through altered consumption patterns (Podkaminer 1982, 1988) or because housing shortages restricted labor mobility (Mayo and Stein 1988). This paper examines the disincentive to supply labor which arises from housing market disequilibrium. The disequilibrium is measured by four variables. One is a measure of density, while the others are based upon the number of persons in official housing queues. Each of the variables is negative and significant in the two-stage least squares estimates of labor supply. Estimates disaggregated by skill-class are also presented. Housing market disequilibrium has the greatest impact on the labor supply of the least skilled.

Housing is a persistent economic problem in Eastern Europe. Families typically wait ten to fifteen years to acquire small, poorly constructed apartments. "Doubling up" with relatives is common.(1) Under reforms instituted in Poland in recent years the situation has grown steadily worse, with construction projects halted for lack of funds.

Poland, and the other countries of Eastern Europe, have poorly developed housing markets, which have been marked by heavy subsidies for housing construction and severe controls on rents and mortgage credit. In the past only about 5% of household income went toward rent (as compared with about 30% in the U.S.). More recently, this proportion has been rising, but is still low compared with Western Europe. At the same time, there appears to have been underinvestment in the housing sector.(2) The resultant excess demand for housing affected not only housing per se but other markets as well, especially the labor market.

There are potentially at least four responses to such an excess demand: (1) increased spending on alternative (private sector or second economy) housing; (2) increased spending on other (nonhousing) goods; (3) increased nonhousing savings (i.e., monetary overhang(3)); and (4) a reduced incentive to work. These effects are not mutually exclusive - some part of the housing market disequilibrium may be channeled into each of these areas. Furthermore, some of the areas (e.g., non-housing consumption) may themselves be characterized by disequilibrium.

The idea that the housing market disequilibrium drives the results in other markets is suggested by a couple of factors. First, the housing market disequilibrium is large, arguably larger than the disequilibrium in other markets. Second, the housing market disequilibrium importantly affects the lives and behavior of most people. The housing market disequilibrium differs from that in other markets also in that there are fairly good data (as described below) for gauging the size of this disequilibrium.

The purpose of this paper is to estimate the effect of housing market disequilibrium on the supply of labor (the disincentive effect referred to above) using cross-sectional (voivodship-level) data from Poland for the two most recent years, 1989 and 1990, for which they are available. The study addresses two basic questions. First, does the housing market disequilibrium result in a disincentive to supply labor, and, if so, what is the size of this effect? Second, for whom is this disincentive effect, if it exists, largest? By examining the sign and significance of a variable representing the housing queue in the aggregate labor supply equation we can address the first question. We can address the second question by disaggregating the labor supply into rough skill categories.

Such estimates permit a fuller assessment of the efficiency losses associated with the housing disequilibrium. This is an important question because it is likely that some form of the same government regulations that lead to the disequilibrium will be retained during the transition. Furthermore, estimates specific to skill categories also give some idea of the equity effects of housing market disequilibrium. …