DP11649 | Phoenix from the Ashes: Bombs, Homes, and Unemployment in Germany, 1945-2011

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What shapes an economy's ability to absorb shocks? We test the hypothesis that high homeownership impairs the labour market's ability to absorb shocks through restricting labour mobility. Our results are relevant to the debate on Europe’s high and unevenly distributed level of unemployment. We find that high homeownership hinders the convergence of unemployment rates across a panel of 85 German regions over 1998 to 2011. To deal with endogeneity, we use variation in the timing and intensity of WWII Allied bombing of Germany, which destroyed the country’s housing stock and led to the wide-scale public provision of rental accommodation. We show how bombing during the war created substantial variation in post-WWII housing subsidies and contributed to persistent differences in homeownership across Germany. We find that moving from the first to second quartile in homeownership rates almost doubles the unemployment growth rate. Moreover, we provide evidence that homeownership restricts gross emigration rates, supporting the idea that labour mobility is the key mechanism behind our finding. Housing policies matter for labour markets.