The post-COVID-19 housing boom as a cause of the US Great Resignation

The term 'Great Resignation' came into use last year to refer to a sustained decline in the labour force participation rate in the US. As I noted last year, there is little evidence that there has been a Great Resignation in New Zealand, despite media commentary suggesting that there has been. However, this working paper from last year, by Jack Favilukis and Gen Li (both University of British Columbia), is making me wonder why New Zealand didn't experience a Great Resignation.

Favilukis and Li look at whether the COVID-19 housing boom explains the US Great Resignation, using data from the American Community Survey. They start by showing that the Great Resignation was concentrated among older workers. Specifically:

First, up to 2019, the labor force participation rate was rising for all age groups, but especially for older Americans. Second, in 2020, labor force participation fell for all groups, but most dramatically for the youngest and oldest Americans. Third, with the exception of the oldest Americans, all groups returned to the labor force in 2021 and were near or even above 2019 rates by 2022. On the other hand, the oldest Americans further reduced labor force participation in 2021 and continued to stay out of the labor force in 2022. By 2022, nearly the entire reduction in the labor force participation rate was due to the 65+ group. This is especially striking given the pre-2020 trend.

Favilukis and Li then look at whether employment, or weekly hours worked, are related to the housing market return over the past 4.5 years. They estimate this relationship separately for each year, age group, and homeowners/renters, allowing them to look at whether these various groups were affected in different ways by the post-COVID-19 housing boom. The results don't appear to be particularly sensitive to the choice of 4.5 years of housing market returns as the key variable, with other lengths of time showing similar results.

They find that, for 2021:

Renters tend to increase their labor force participation in response to house price increases; a 40 year old renter increases her probability of being in the labor force by approximately 0.07×0.10 =0.7% for every 10% increase in house prices (e.g. from 80% to 80.7% participation). This is statistically significant... Older renters are less reactive to house price changes, with slopes slightly positive but rarely statistically significant.

Younger owners also increase their labor force participation in response to house price increases, although their response is much lower than that of younger renters... Middle aged owners are relatively unresponsive to house price changes – their labor force participation falls slightly in response to higher prices but this is not statistically significant for one year age buckets.

However, individuals above 60 have a strong negative response; a 65 year old owner decreases her probability of being in the labor force by approximately 0.11 × 0.10 =1.1% for every 10% increase in house prices (e.g. from 15% to 13.9% participation). This is strongly statistically significant...

So, it appears that the 'Great Resignation' was concentrated not only among older workers, but among older workers who are homeowners, rather than renters. And, the propensity to be out of work within that group is strongly related to housing returns. Moreover, in metropolitan areas where housing returns were higher, the Great Resignation among older homeowners was bigger.

Which brings me back to my comment from the start of this post. Post-COVID-19 housing returns have been relatively strong (according to the QV House Price Index), and yet we haven't experienced the same substantial decrease in the labour force participation rate as seen in the US. Here's the labour force participation rate among people aged 65 years and over in New Zealand over the period since 2016 (source here):

There's little evidence of a Great Resignation among older people in New Zealand. The trend remains generally upwards over time. Unfortunately, the freely available data don't allow us to look at the difference between homeowners and renters, but if there were similar effects to those reported in the Favilukis and Li paper, the Great Resignation among older homeowners would be apparent in the overall statistics without looking at those homeowners and renters separately.

Favilukis and Li conclude that:

High house prices allowed many older Americans to retire early; if not for the high house prices, their labor force participation in 2021 would have been similar to 2019.

However, clearly there is more to the story than simply a housing boom leading to Great Resignation, otherwise we would have likely seen the same effect in New Zealand. New Zealand house prices are high. Why didn't that induce older New Zealand homeowners to retire early? Hopefully, someone is investigating that question.

[HT: Marginal Revolution, last year]

Read more:

• The myth of the Great Resignation (in New Zealand)