The Functioning of Housing Markets and the Adjustment of Labor Markets

Abstract

The report examines the functioning of housing markets and the adjustment of regional labor markets primarily based on recent economic literature. The perspective of the analysis is the development outlook of Finland’s housing markets in the late 1990s and early 2000s.

Empirical studies conducted with Finnish data generally support the view that owner-occupancy would reduce the extent of internal migration, hinder the adjustment of regional labor markets, and thereby worsen the structural unemployment problem. However, empirical research has not yet been able to identify precise microeconomic channels that generate the observed relationship between unemployment and owner-occupancy. This means that the role of owner-occupancy as a potential barrier to labor market adjustments remains open, and existing empirical results should not be regarded as definitive truths. The claim that unemployment rates are high in labor market districts with a substantial amount of owner-occupied housing, while controlling for other factors influencing unemployment levels (such as age structure, long-term unemployment, and education level), cannot be unequivocally substantiated with Finland’s labor market district data. The reason for this is that Uusimaa is a clear outlier among the labor market districts.

Housing prices have increased most sharply in the growth centers of Southern Finland and along the coast following the recovery of the national economy. As a consequence, potential capital losses from housing transitions continue to hinder migration from Eastern and Northern Finland to the growth centers of Southern Finland. If housing prices recover to pre-recession levels in the early 2000s, it may lead to an increase in migration to Southern Finland. However, this development is unlikely, as a significant increase in housing prices in Eastern and Northern Finland would require a substantial improvement in employment compared to current levels. An improvement in employment in Eastern and Northern Finland, in turn, would mean that relocating to the centers in Southern Finland and along the coast would not be as economically justified.

Increased migration also affects the functioning of housing markets. Migration raises the price and rent levels in the target area. Empirical studies have shown that the initial phase of increased income migration mainly manifests as a rise in rent levels in the area, but within a year of intensified migration, there is also an increase in the prices of owner-occupied homes. The end result can be the stagnation of migration, resulting in an inability to balance the regional imbalance in labor markets. For the current situation in Finland, this indicates that the rising price and rent levels in Uusimaa diminish inward migration to the region, thereby mitigating the most severe concerns regarding population concentration in Southern Finland. This effect is more significant than the lower mobility of owner-occupiers in terms of the adjustment of labor markets.

• ISSN: 1236-7184
• ISBN: 952-5071-27-8
• Publication in PDF-format