The Impact of Real Estate Ownership on Labour Market Behaviour: Evidence from the Natural Experiment of the German Reunification

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The financial crisis has cast a spotlight on the interaction of real estate and labour markets. Do wealth losses, often in the form of reduced house prices, prevent people from becoming self-employed? Do high rates of home ownership impede migration out of the areas hardest hit by the crisis? The theoretical mechanisms underlying these questions are well understood and plausible, but are they empirically relevant?In answering this question we face the problem that real estate and labour market outcomes are simultaneously endogenously determined. To identify causal relationships despite these endogeneity problems, we need credibly exogenous variation of real estate ownership. It is the main goal of this project to employ the natural experiment of the German reunification and, in particular, the quasi-random allocation of home ownership during the GDR, to investigate the impact of home ownership on labour market outcomes such as employment and self-employment.In Gebhardt (2013) I argue that the property rights of homeowners were so diluted in the GDR that homeownership became practically irrelevant and was, therefore, acquired quasi-randomly as a by-product of dwelling choice. Homeowners could neither sell nor rent their homes without government permission, they could not even move into their own property. Once they lived in their property, they did control it de facto, but so did renters. Housing costs, be it rents or house prices, were negligible in the GDR. After the re-unification, however, the owners were bestowed upon the full range of property rights of the West German legal system and all prices started to increase and converge to market levels. In this project, we compare the labour market outcomes of households that happened to acquire or retain real estate property during the years of the GDR with those households that ended up renting. GDR owners, for example, turned out to be much wealthier after re-unification. This variation of wealth is a within region variation so that we can compare individuals that face the same macroeconomic environment, but have different real estate wealth endowments. If we find a correlation of these endowments with self-employment, we can convincingly argue that we found a causal relationship. Similarly, GDR homeownership increases the probability to own your home even years later. If we find that these homeowners have significantly different labour market outcomes from people who rented during the GDR, we can convincingly argue that this is a causal effect untainted by a selection effect, as people surely did not choose homeownership during the GDR based on the perceived labour market conditions in a future reunited Germany that they could not anticipate or imagine.