The risk of job loss, household formation and housing demand: evidence from differences in severance payments

Recent cohorts in various developed countries take a longer time to form their own household and display lower rates of home ownership than older cohorts. Previous literature has linked these developments to higher job instability, especially among youths. We exploit the large differences in firing costs across contract types in the Spanish labor market to identify the causal link between sharp changes in the risk of job loss and the timing of different forms of household formation among youths. Our identification strategy uses variation in regional incentives for firms to promote high firing cost contracts between 1997 and 2009. Using data from the 2002-2014 waves of the Spanish Survey of Household Finances, we document that an increase of 1% in the stock of workers with an open-ended contract increases the probability of forming a new household by a similar magnitude (especially through renting new accommodation). The results are consistent with the predictions of precautionary saving models, whereby individuals exposed to the risk of job loss postpone their consumption of housing services.