Why home ownership causes unemployment.

The economic mysteries of daily life.
March 17 2007 12:09 AM

The Renter's Manifesto

Why home ownership causes unemployment.

All the talk over here in Britain is of the workers of Treorchy, Wales, who have lost their jobs as the iconic Burberry company shifted production to cheaper parts of the world. I don't need to explain all the local details, because there are plenty of similar stories in the United States, and everywhere else. Any community, small or large, with a lot vested in a single industry is vulnerable to shifts in the economic landscape. Just ask the residents of Flint, Mich.

Globalization is often blamed, but it's not the only source of change. Domestic competition can be just as powerful, as any cafe owner with a Starbucks across the street can confirm. So can management blunders: Toyota seems to be demonstrating that it is profitable to make cars in the United States, just not in Detroit, and not with union labor. Then, there is technological change. Just think of all the typists who have been forced to learn new skills and find new jobs thanks to mighty Microsoft Office.

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Big cities can struggle if they overspecialize and then find that times change. Detroit is an example. So is Manchester in Northwest England. Birmingham, in the English midlands, is a different story, a city bustling away, making everything and nothing in particular. As the wise economy-watcher Jane Jacobs once pointed out, Birmingham was thought highly inefficient compared with the specialized mills of Manchester, but when the downturn came, Manchester was devastated and Birmingham kept on chugging along. Chicago, Seattle, New York, and London have similarly reinvented themselves again and again.

Which brings me to this week's mystery: Why do people still live in Detroit, which has suffered so much for so long? Why not move to Chicago or New York? People originally moved to places like Treorchy because there was coal to be mined. Now that the mines have closed—and the Burberry factory too—why do they stay?

One reason, of course, is that community ties matter. Many people like to stay near where they were born. But many others would like to seek new opportunities—even, dare I say it, new experiences. My own father moved the family to four different locations, dotted across England, in pursuit of work. I've moved several times myself to find the right job, and only occasionally regretted it.

But emotional ties are not the only ones that bind us. There are Byzantine restrictions on cross-border migration. Philippe Legrain, author of Immigrants: Your Country Needs Them, argues that freer migration would promote creative, economically robust cities. He is right.

Even when we look only at internal migration, the barriers are formidable. Wherever people seem particularly keen to own their own homes—as in the United Kingdom, Spain, and some U.S. states—employment suffers as a result. English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of unionization don't explain unemployment nearly as well as the tendency to own houses. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.

Recent research in the Economic Journal suggests that people who own their own homes form denser local networks, which help unearth local jobs. Still, the jobs tend to be less well-matched and commuting distances are longer. So, professor Oswald is right to argue that we should do everything possible to free up impediments to renting or to selling a house and buying a new one. It would be handy if we were allowed to build houses near Manhattan, too.

Even if we did all this, economists Ed Glaeser and Joe Gyourko argue that one serious barrier remains: Houses do not walk. No matter how bad things get in Detroit or Treorchy, the houses will still be there, and if they are cheap enough, people will want to live in them. The likely result is a gloomy sort of segregation: Those who feel that they can find a good job in the boom cities will move there and pay the higher rents. Those who are less confident of that would rather have no job in a cheap house than no job in an expensive house. Detroit will have residents for a long time to come.

Tim Harford is a Financial Times columnist. His latest book, The Logic of Life, will be published in paperback on Feb. 10.

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