Housing and Labor Market Dynamics in Growing Versus Declining Cities

Abstract

This paper reconciles a debate on the nature of regional supply responses to demand shocks. Cities are found to exhibit dramatically different housing and labor market dynamics in response to local demand shocks, consistent with the hypothesis that the durable nature of the housing stock acts as a supply constraint in declining cities. These results imply that demand-driven models are appropriate in growing or stable cities, and models with supply constraints are more appropriate in declining cities. Failure to apply the correct class of models to a particular city will result in biased estimated employment, house price, and wage effects of both market-based demand shocks and demand-side stimulus policies.