Abstract
AbstractHousing and financial market shocks affect frictional labor markets. We structurally estimate a model of job search with accumulation of liquid and residential wealth and randomly persistent house prices. Using NLSY data from 1978 to 2000, we show that reservation wages and nonemployment increase in total wealth and respond to the composition of wealth, home prices and financial markets' tightness. We cluster counties of residence by HPI growth and find a residential wealth effect on labor markets that erodes with fast home price growth. When we counterfactually fix downpayment rates above observed trajectories, nonemployment becomes one percentage point higher in counties of average or fast home price growth and 1.2 percentage points lower where home prices are stagnant. Fixing interest rates at 2% generates a 0.5 percentage point decline in nonemployment in counties with no home price growth, but no changes where price growth is average or fast.
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