Searching for Flexibility: Labour and Housing Market Interactions in the UK

Tatiana Kirsanova, Oyvind Masst and Charles Nolan

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper studies interactions between labour and housing markets in the United Kingdom. We estimate a New Keynesian DSGE model with search frictions in both markets, cross-market spillovers, and regime-switching monetary policy using UK quarterly data from 1971 to 2025. The estimates imply strong two-way interactions: housing-market disturbances affect unemployment, job creation and labour-market tightness, while labour-market shocks propagate into house prices, rents and housing activity. We use the model to study the major structural changes associated with the Thatcher era, including falling public housing construction, rising owner occupation and declining worker bargaining power. The results suggest that the largest effects operated through the labour market: lower bargaining power reduced unemployment substantially, while housing reforms increased owner occupation but did not generate a large lasting improvement in affordability.

Keywords: estimated New Keynesian DSGE model; monetary policy; search-and-matching frictions; labour and housing markets; Thatcher times (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 E65 (search for similar items in EconPapers)
Pages: 80 pages
Date: 2026-08
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-66

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