Saturday, 30 July 2011

Home ownership and economic mobility

A couple of weeks ago James Gregory of the Fabian Society published an article on the Fabian Society’s Next Left blog where he discussed the impact of increased home ownership on the economy, and the labour market in particular. The central tenet of the article was that the continuous increase in home ownership seen in the UK over the last thirty years has reduced the capacity of the labour market to respond flexibly to economic changes. Rather than complementing and enhancing the legislative changes introduced by the Thatcher and Major governments that were supposedly designed to liberalise the labour market in this country and increase growth, his argument is that increased home ownership has instead acted, at least partially, to neutralise many of those changes and thereby presumably retard growth.

What I found surprising about the article though, were its starting assumption that most people (or perhaps only most of the current political class?) believe that home ownership increases economic mobility, and secondly what I perceive to be the article's failure to fully describe the true extent of the causes and impact of this immobility. As a result some of what I would consider to be potential remedies were neglected. For by omitting some of the causal factors, it is undoubtedly more likely that some of the most effective solutions will also be overlooked. However what the article does do is once again highlight the negative impact that current housing policy (such that any active policy actually exists in the UK) has on the British economy.

Given the well-known problems of transaction costs (estate agent fees, stamp duty, surveyor fees, re-mortgage fees, conveyancing etc) and the logistical problems associated with the home moving chain, I was more than a bit surprised that "popular opinion" was perceived to be as the article implied. I have certainly never been of the opinion that home ownership may actually make workers more economically mobile. In fact I suspect that most people are not, and do not even desire to be economically mobile. This conjecture is probably borne out by the average time between re-sales for domestic property in the UK (currently about 20 years). You can see the immobilising effect of home ownership by comparing this value with the average length of time most tenants stay in the same property (often for only a few months). Doubtless, much of this difference is due to what James Gregory referred to as "psychological attachment". Homeowners have a lot of emotional as well as financial capital invested in their homes that is generally absent for many tenants.

James Gregory also rightly points to the principal contradiction in UK economic policy: “why have we spent the past 20 years actively pursuing ‘flexible’ labour market policies whilst, simultaneously, seeking to push more and more households into homeownership?” The answer, he claims, lies partly in the myth “that owner-occupation is a vehicle of social and labour market mobility.” It may well be that owner-occupation advances the former. Unfortunately, it most certainly acts against the latter. In addition to the transaction costs described above, there are a number of other reasons why owner-occupation acts to reduce labour market mobility. James Gregory highlighted in particular the pressure some homeowners face to keep up their mortgage payments. Such pressure can often trap homeowners in jobs thereby reducing or removing their ability to change career or relocate. However, I think there are some other pressures that are perhaps even more problematic, not just for the individual, but for society as a whole.

The first is the rise in, and the impact of, double income households. The high cost of housing (both home-ownership and rental) is forcing more families to send both adults out to work. This in itself acts to reduce mobility even more as the probability of both adult partners with different careers being able to find suitable jobs in the same part of the country at the same time is always going to be less than the probability that each will find work independently.

This then leads to a second problem: an increased tendency for skilled labour to cluster in regions of high employment density such as the South East where both partners are more likely to find suitable employment. This in turn leads to greater regional inequality and overheating of some local economies. This positive feedback mechanism then further exacerbates the original effect (i.e. high house prices) that gave rise to the problems of low mobility and employment clustering (caused by a move towards double income households) in the first place.

This clustering then also impacts on employers. Many firms, particularly those that depend on highly skilled labour, have already recognised this problem. As a result they also tend to cluster in regions where the skilled labour is already situated, thus adding to regional inequality. Moreover there is a growing tendency for many of these firms to actively reject job applications from outside their local area because of worries about mobility and relocation problems, thereby adding to the imbalance.

The result of all of this is that regional disparities in house prices are exacerbated. This also acts as a further impediment on labour mobility, at least for those trying to move from poorer areas to wealthier ones.

Finally there are the issues of short-term and part time jobs. These may give employers greater flexibility, but the cost is borne by the worker (and to some extent the State). Just as it is more difficult for a family of two adults to move and find new employment for both of them than it would be for a family with just one wage earner, so it is also more difficult for an individual with several part time jobs to move and replace all of those jobs simultaneously than it would be to replace a single full time position.

These then are some of the additional problems that I would seek to highlight. Unfortunately I can see little reason why the remedies that James Gregory proposes would make much difference. For example, providing more advice and assistance to those with mortgage problems will at best only slightly ameliorate an already abysmal situation. In fact it could actually make the situation worse by giving artificial external economic support to home owners who having inflated the housing market are unfairly supported within it through taxpayer support. What is needed is a set of policies that tackle the underlying problems.

The first of these problems is excessive house prices that force families to work longer hours than is socially desirable and which have wider consequences that are economically undesirable. Until a government commits itself to delivering stable and reasonable house prices this problem will not go away. This requires an economic policy that delivers such stable and reasonable house prices (as I have previously outlined) so that families can reclaim a more socially desirable work-life balance, and more of their disposable income can be recycled within the productive economy rather than being sunk into unproductive fixed assets.

The second problem to be addressed is the issue of regional inequality. For this we need progressive tax rates for employers (NICs, land tax and business rates) that vary regionally and decrease with distance from London. We also need more investment in the regions that doesn't just increase employment, but provides high value jobs. For this we need to look to France and Germany and establish a network of research institutions akin to the Max Planck, Fraunhofer and Helmholtz Institutes in Germany (of which there are more than 150) or the CNRS in France (of which there are over 100 separate facilities). These policies would indeed attract high value jobs back into the regions and do so far more effectively and more sustainably than the current system of regional development grants.

Finally we need to actively reduce the number of part time jobs in the economy. Flexibility is OK in good measure, but the balance has clearly gone too far. There are currently about 1.2 million people working in part time jobs while actively seeking full time positions. Much of this increase in part time working is driven by the way employers' National Insurance contributions (NIC) are levied. Employer NIC exemptions for jobs that pay less than about £110 per week should be limited to companies with less than five employees. The purpose of these exemptions should be to help a very small company take on the one or two extra staff it needs to meet fluctuating demand. They should not be used by large chains of stores to reduce their tax bill. Large companies should already have sufficient employment flexibility by virtue of the size of their workforce. Currently too many are exploiting this tax loophole for their own financial advantage, but to the detriment of the wider economy.

These then are some of the solutions that the Left should be complementing. First, though, it needs to recognise the wider impact that the housing market has on the UK economy. Building more houses, or providing more social housing, is not enough. Neither is simply setting up a few advice networks for distressed home-owners. The problem is much wider and more entrenched than can be solved by such simplistic solutions.

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