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Dhruvin Patel

Econ 4750 Term Paper

The paper tries to estimate an impact of homeownership on unemployment outcomes, while considering

other exogenous variables which also may affect unemployment. Estimation of the level of impact of homeownership

on unemployment outcome, given some assumptions and constraints, will allow for an establishment some

correlation. A dataset that includes measures of homeownership and unemployment outcomes for a group of

workers between 1985 and 1995 will be used to for the unemployment analysis. Using multivariate OLS regression

and IV regression, the study tries to minimize error terms, variable insignificance to make the models more

acceptable. By running a multivariate OLS regression on various exogenous variables that affect unemployment, the

models show that homeownership reduces unemployment holding other variables constant.

While Coulson and Fisher argue in their Tenure Choice and Labor Market Outcome paper about a positive

correlation between homeownership and unemployment they seem to be unclear about the causal relation between

the two. It is obvious that both variables are simultaneously correlated with each other, so the matter of endogeneity

becomes crucial, which they do not attempt to address. In Munch’s Homeownership and Job Duration and waged

paper, they carefully explain the selection process and address endogeneity in their model and try to correct for it

using panel data. They also find their model to be consistent. Munch contradicts Coulson’s claim of renter’s having

advantage over homeowners during recession. Munch’s model can conclude that homeownership is negatively

correlated with unemployment outcomes because homeowners are reliable in terms of long term employment; a

group which becomes safe to invest human capital in due to their job stability.

Today lots of Americans remain affected post US recession and housing market crash. In order the get

these people back to where they were before the economic crisis, some macro-measures must be taken in the form of

policies by the government. The goal for the government should be to lower unemployment. Through a study that

looks at the homeownership rate as a significant predictor for unemployment, policies that grow homeownership

such that they would reduce unemployment should be focused upon. Whether it be through lowering interest rates to

make homes affordable or to allow mortgage interest deductible on affected people’s tax returns, these policies

should ultimately reduce unemployment, if the econometric models give a meaningful relationship between them.

With the help of economics, the paper explains how increasing homeownership would reduce

unemployment, given that the assumptions of the econometric models hold. Followed by the recession of 2007,

many individuals in the US labor market lost their jobs. Homeowners among these individuals are expected to stay

unemployed due to the high transaction cost of moving to a place where they could find a job. The stickiness in the
Dhruvin Patel
Econ 4750 Term Paper

labor market followed by the recession seemed to be a major cause of the prolonged recession. While lots of

unemployed homeowners were actively seeking for jobs, they were unable to switch to a new location with lower

unemployment, because they were either tied down by mortgage contracts, or they had difficulty selling their homes

due to the US housing bubble that occurred within the same time frame as the recession. To solve this problem from

a micro perspective, unemployed homeowners would have to rent a home in a location with lower unemployment,

and suffer a default on their mortgage. Otherwise, they could continue their mortgage payments alongside paying

rent at the new location. The latter seems less feasible, given the competitive low salary during recession. From a

macro perspective, the economic crisis could be solved, if somehow both US housing and labor markets could be

triggered to grow in the right direction with a single optimal policy. A policy that allows unemployed homeowners

to move out of their high unemployment region to a location with job availability would supposedly reduce

unemployment, given that renters switch to homeownership by purchasing a mortgage on a home previously owned

by an unemployed individual. Before implementing such a policy, however, its effectiveness needs to be tested.

Moreover, by determining how other variables in our econometric model affect unemployment, a more specific

policy can be designed to curb unemployment.

The study begins by using the following econometric model:

Weeks_unemployedi= β0 + β1owni + β3agei + β4age2i + ΩẌ + Ɛi (1)

Ẍ={testPCT;education;race;female;married;children;ownocc;id}

Where, education={HS, SC, Coll}

race={Hispanic, Black}

ownocc={med_ownocc, high_ownocc}

own: 1=homeowner, 0=Renter age: respondent’s current age in years

testPCT: Percentile Score on Survey Exam HS: 1=high school graduate

SC: 1=Attended College, did not obtain a 4yr degree the female: 1=Female, 0=Male
error term in the mode

Coll: 1= Attended College, Obtain 4-yr Degree married: 1=Married

age: Respondent’s Current Age in Years children: At least One Child

age2: age2 id: Respondent identifier

high_ownocc: 1=Home Ownership Rate >75 in med_ownocc: 1=Home Ownership Rate >60% & <75% in
Dhruvin Patel
Econ 4750 Term Paper

Respondent's’ Home County as a Child Respondent's’ Home County as a Child

Note: [HSDrop: 1=Less than High School Degree] & [low_ownocc: 1= 1=Home Ownership Rate <60% in

Respondent's’ Home County as a Child] were omitted by Stata due to collinearity.

Upon running the above regression including all variables with ordinary least squares in Stata, the data was

tested for heteroskedasticity using Breusch-Pagan test. The null hypothesis is that residuals are homoscedastic. The

test results show that P-value > chi2 = 0.000, which means that there is a zero probability of the residuals in the

model to be homogeneous. Therefore, the possible heteroskedasticity in the model must be dealt with, otherwise, the

model may end up having wrong estimates of the standard errors for the coefficients and so would their t-values.

Heteroskedasticity can be controlled for in two ways- heteroskedasticity-robust standard errors or weighted least

squares. Given that the data set has a high number of observations, robust estimation technique can be used.

Therefore, every regression model used in this study is controlled for heteroskedasticity.

Upon using the robust estimation to control for heteroskedasticity, the model was tested for

multicollinearity to find presence of inflated standard errors. When multicollinearity is present, standard errors may

be inflated. One regressor should not be a linear function of another. Command vif was used to check for

multicollinearity. It was found that all variables had vif and 1/vif were less than 10 and greater than .10 respectively.

However, age and age2 had vif and 1/vif not within the limits. This makes sense because age2 is the square of age,

and that age2 had a quadratic(non-linear) relation with Weeks_Unemployed. Therefore, the test proves an important

OLS assumption that the regressors are not perfectly multicollinear.

Another assumption of the regression model (OLS) that impact the validity of all tests (p, t and F) is that

residuals behave normal. To test the normality of the residuals in the dataset, kdensity graph was produced in Stata.

The data seemed to have a normal shape; however, it was skewed to the left, therefore, a non-graphical approach

was taken for normality test. Shapiro-Wilk tests the hypothesis that the distribution is normal. Since, the Prob>z =

0.00000, the tests show that the residuals are not normal and therefore, degrades the validity of p, t and F values of

OLS regressions ran using this model.

To carry on with the model estimation, it must be tested for consistency. Consistency can be established if

the independent variables are exogenous, that is is E(Ɛi|Xi)=0, where Ɛ is the error term, e, represented in the model
Dhruvin Patel
Econ 4750 Term Paper

tested, and Xi are all the variables that affect Weeks_Unemployedi. Testing for omitted variable bias is important

for our model since it is related to the assumption that the error term and the independent variables in the model are

not correlated (E(e|X) = 0). Upon running the ovtest on the OLS model, p-value was known to be 0.0000, which

indicated that our model suffers from omitted variables and therefore cannot be held consistent.

To remove or reduce the endogeneity between own and other variables, a correlation matrix of all variables

was commanded in stata using command ‘pwcorr.’ It was found that the main variable own was correlated with all

other variables by at least .05. This is problematic, because other variables cannot be held constant, while changing

own alone. If a renter were to switch to homeownership, then it is very likely that it due to marriage, children, and

other factors that in turn influence the unemployment outcome. Therefore, it is impossible to interpret an isolated

effect of homeownership on unemployment without solving for the endogeneity that ‘own’ brings to the model. The

decision of a renter to purchase a home, that is for own to change from 0 to 1 depends on other variables in the data

set presented and possibly due to external factors that have not been included in the data set, such as renter’s

employment prospects or inheriting wealth from family, that increases probability of homeownership. In order to

account for this endogeneity, two stage regression model was used.

The model is as follows:

1. Stage one: own= α0 + α1age + α2age2 + α3race + α4education + α5married + α6children + α7ownocc

2. Stage two: Weeks_unemployedi= β0 + β1owni + β3testPCTi + β4id + β5female + Ɛi (2)

Above model was used in the light of a maximized R2, with a higher possibility of removing endogeneity.

In state both steps could be performed using one command, ‘ivregress 2sls.’ Upon looking at the postestimation

reports, it was understood that ‘own’ variable was in fact an endogenous variable by performing an endogeneity

tests using estat endog command. P-value was found to be 0.0000 for both Durbin and Wu-Hausman scores,

allowing for the rejection of the null-hypothesis of the test that instrumented variables are exogenous. Followed by

another test, with command ‘estat firststage,’ which gave a high F-statistic relative to the critical values of the

instruments used. This allowed for the rejection of the null-hypothesis of the test that instruments are weak. Even

with strong instruments used for an endogenous variable, the model failed the test of overidentifying restrictions,

making the instruments invalid. In addition, there always remains a selection bias in our model where a renter could

be self-employed and thereby counted as unemployed during a survey.


Dhruvin Patel
Econ 4750 Term Paper

In the relation between homeownership and unemployment outcomes, a positive correlation between the

two variables was unachievable. In addition, the tests performed to test the validity of both models does not bring

enough confidence to call the negative correlated variables to have a causal relationship. Although the standard

errors were increased, the constant term were considerably reduced upon using the IV regression. It also reduced the

R2, which suggests that only 3% of the model is described by the IV regression model, a reduction from 5%

description of the dependent variable using the OLS regression model. However, even with better standard errors

and R2, the OLS model cannot to be used to find causality due to inconsistency and non-normality. Regarding policy

implication, macroeconomic tools must be used influence boost homeownership. From an economic standpoint

increase homeownership may reduce unemployment, from a statistical standpoint nothing more than a simple

correlation can be established between the two.

(1) (2)

VARIABLES Model 1 Model 2

own -1.059*** -2.846***

(0.0751) (0.161)

age -0.638***

(0.150)

age2 0.0113***

(0.00259)

race 0.356***

(0.0989)

education -0.389***

(0.148)

married -1.156***

(0.0844)
Dhruvin Patel
Econ 4750 Term Paper

children 0.191**

(0.0855)

female -0.615*** -0.566***

(0.0695) (0.0718)

testPCT -0.0278*** -0.0350***

(0.00147) (0.00280)

id 4.17e-05*** 3.04e-05**

(1.29e-05) (1.20e-05)

ownocc 0.616***

(0.0847)

Constant 13.35*** 5.210***

(2.151) (0.154)

Observations 42,392 42,392

R-squared 0.043 0.029


Dhruvin Patel
Econ 4750 Term Paper

Shapiro-Wilk W test for normal data

Variable | Obs W V z Prob>z


-------------+--------------------------------------------------
e | 42392 0.54767 7369.659 24.626 0.00000

ovtest

Ramsey RESET test using powers of the fitted values of Weeks_Unemployed


Ho: model has no omitted variables
F(3, 42377) = 101.92
Prob > F = 0.0000
vif

Variable | VIF 1/VIF


-------------+----------------------
age | 201.64 0.004959
age2 | 201.00 0.004975
race | 1.88 0.530525
married | 1.57 0.636414
testPCT| 1.51 0.660568
id | 1.49 0.673250
,children | 1.48 0.674274
own | 1.43 0.701619
education | 1.15 0.869840
female | 1.07 0.938164
ownocc | 1.05 0.952988
-------------+----------------------
Mean VIF | 37.75
Dhruvin Patel
Econ 4750 Term Paper

estat endog

Tests of endogeneity
Ho: variables are exogenous

Durbin (score) chi2(2) = 141.004 (p = 0.0000)


Wu-Hausman F(2,42385) = 70.7254 (p = 0.0000)

. estat firststage

Shea's partial R-squared


--------------------------------------------------
| Shea's Shea's
Variable | Partial R-sq. Adj. Partial R-sq.
-------------+------------------------------------
own | 0.2224 0.2222
--------------------------------------------------

Minimum eigenvalue statistic = 1328.93

Critical Values # of endogenous regressors: 1


Ho: Instruments are weak # of excluded instruments: 7
---------------------------------------------------------------------
| 5% 10% 20% 30%
2SLS relative bias | 16.88 9.92 6.16 4.76
-----------------------------------+---------------------------------
| 10% 15% 20% 25%
2SLS Size of nominal 5% Wald test | 23.72 13.34 9.77 7.91
LIML Size of nominal 5% Wald test | 3.90 2.83 2.52 2.35
---------------------------------------------------------------------

. estat overid

Tests of overidentifying restrictions:

Sargan (score) chi2(5) = 144.341 (p = 0.0000)


Basmann chi2(5) = 144.8 (p = 0.0000)

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