Employment Fluctuations, Real Estate Prices and Property Taxes

Abstract

This paper studies the role of real estate prices on employment fluctuations. We focus on the relative importance of the housing wealth and firm collateral channel on employment. We use empirical evidence from Italian municipality data and feature a quantitative model with financial frictions to quantify each channel. First, we exploit municipal-level variation in property tax changes to estimate its effect on labor, consumption, and real estate prices during Italy’s 2012 property tax reform. Then, we use the estimates to calibrate a quantitative model that includes houses and commercial real estate charged with different property tax rates. We find that both channels explain more than 50% of the employment decline due to higher property taxes. However, the firm collateral channel reduces employment by 20% more than the housing wealth channel.