The Great Resignation was caused by the COVID-19 housing boom: study

When the global pandemic took hold in 2020, millions of North Americans were laid off — but when employers started rehiring, many workers never returned, triggering a phenomenon known as The Great Resignation. So what led legions of people to call it quits? According to a new study from the UBC Sauder School of Business, it was the soaring real estate prices.

UBC Sauder Associate Professor and study co-author Jack Favilukis says that by late 2021, employees in their 20s and 30s were back to participating in the labour force at pre-pandemic levels — but workers in their 50s, 60s and 70s were returning at far lower rates. While some guessed that family concerns or COVID fears could be keeping them away, Favilukis had a different hypothesis: that skyrocketing home values were allowing older workers to leave the labour force earlier than expected.

To test the theory, Favilukis, along with UBC Sauder Ph.D. student Gen Li, examined data from the American Community Survey, which gathers census-like statistics about everything from demographics to home prices to labour force participation in metropolitan areas across the U.S. Specifically, they looked at groups by age and home ownership — and they found that when house prices jumped, homeowners participated in the labour market less, while renters participated more.

The effect was especially strong around age 65 when people normally retire, says Favilukis. “If you’re a 65-year-old, and you just experienced a 15-percent increase in the price of your house, you’re going to be far more likely to leave the labour force,” he explains. “Maybe you were going to leave at 67, but now you say, ‘I got all this price appreciation, so I can leave now.’ This is a very clear and strong effect.”

The pattern was especially strong during COVID-19 because many homeowners saw unprecedented price jumps, explains Favilukis, with some areas seeing home value increases of 20 per cent or more. It was also proportionate: in areas where there was more appreciation, older workers were more likely to call it quits; in areas with less appreciation, they were more likely to keep working.

“So if you compare Detroit, where houses prices didn’t grow by much, with Miami, where house prices grew by a lot, you can see that labour force participation in Detroit didn’t change all that much, but in Miami it changed by a lot,” says Favilukis. The researchers then calculated how much national participation rates would have been had house price growth been normal.

“And we found that for people around 65 years old, the labour force participation would have been back to pre-2019 levels — which tells us that house prices alone can completely explain why older Americans reduced their labour force participation.”

Favilukis says the workforce exodus could be because flush homeowners were more able to take out home equity loans or use reverse mortgages to access cash, while others might have downsized to a smaller home and ended up with a sizable nest egg. Some might have just felt richer, and more confident about stepping off the work treadmill.

The news wasn’t as good for renters, however: in areas where home prices shot higher, workers who rent were more likely to continue participating in the labour force.

“They are made poorer, and the expectation is they’re going to spend more money,” says Favilukis, who adds the effect is strongest for younger renters. “Rents usually go hand-in-hand with house prices, so when house prices go up, rents usually go higher too. And whether they rent or they’re trying to buy, those people are going to have to spend a lot more money, which causes them to need to work more.”

Titled The Great Resignation Was Caused By The Covid-19 Housing Boom, the study, currently a working paper, is the first of its kind to link the Great Resignation with home prices, which skyrocketed as interest rates fell to unprecedented levels and people became more focused on home during the pandemic. Many also moved out of city centres, which sent home prices soaring in more suburban and rural areas.

Favilukis expected to see a link between the Great Resignation and home prices, but was surprised by just how strong and consistent the effect was. “If you look at the effects of wealth on consumption, when equity prices go up by a lot, people’s consumption doesn’t change all that much,” says Favilukis. “So I was expecting to see some effect, but it wasn’t clear that we were going to see such a strong effect.”

While individual homeowners may feel like they won the lottery, Favilukis says that reductions in labour force participation can have negative consequences for the broader economy, including a drop in skilled workers and increased inflation.

“If fewer people are working, fewer goods are being produced or shipped, so prices are going to be higher for those goods,” he says. “And the effect is outsized because these workers tend to be the highest-paid and the most skilled and productive.”

However Favilukis expects the effects will be short-lived. Because price appreciations have stalled, people approaching retirement age are more likely to behave as their counterparts did pre-pandemic.

“I don’t think there are necessarily going to be long-term consequences from this,” he says. “But policymakers should realize that when house prices move by a lot, it’s going to affect people’s labour force decisions.”

Interview language: English