Employment risk and household formation: evidence from differences in firing costs

The rate of new household formation among young adults who live with their parents has decreased in the last twenty years, specially in Southern Europe. At the same time, exposure to the risk that a young adult loses his or her job has increased. We use differences in firing costs across contract types in the Spanish labor market to identify if there is a causal link between both developments. Our first identification strategy exploits a legally-induced sharp increase in firing costs 3 years after the starting of a fixed-term contract between 1987 and 1996. The second uses variation in regional incentives to promote high-firing cost contracts between 1997 and 2001. Both strategies fail to detect a causal impact of job insecurity on the probability of forming a new household. Tentative evidence supports the notion that lower job insecurity has an impact on the form of tenure of the first house of residence, favoring home-ownership over renting.