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Atlanta Fed Working Papers

Atlanta Fed Research Explores Link between Housing Equity and Wages

Photo of Chris CunninghamNew research from the Federal Reserve Bank of Atlanta explores the relationship between housing equity and wage earnings. In "Housing Wealth and Wage Bargaining," the authors—Atlanta Fed economist Chris Cunningham and University of Alabama professor of economics Robert R. Reed—found that workers with negative equity command lower wages than those with significant housing wealth.

Homeowners who owe more on their mortgages than the current value of their homes may try to avoid a so-called "strategic default" for several reasons, including economic factors, emotional ties, or even societal pressures. This aversion to default may help explain a remarkable aspect of the recovery—the 2 percent decline in real wages since the recession ended in June 2009, they write.

Cunningham and Reed note that households typically try to stay in their homes unless they suffer an employment shock—such as a lost job. To avoid such a shock, workers with negative equity tend to bargain less vigorously over wages. As a result, being underwater is associated with a 5 percent decline in wages, the authors found.

Read the working paper, and then access the full series of Atlanta Fed working papers.