A recent IZA discussion paper by Wolfgang Dauth, Andreas Mense, and Matthias Wrede demonstrates that living in affordable housing has long-lasting positive effects on the employment outcomes of low-income individuals. The research integrates data on 465 subsidized rental housing projects in five major Bavarian cities with administrative social security data. This approach allows the researchers to identify individuals who have lived in these housing projects and to track their employment trajectories before and after moving into affordable housing. Given the similarity of the funding scheme to the American LIHTC program, the findings have relevance beyond Germany.
The study’s key finding is that labor income for affordable housing tenants begins to increase two years after admission, compared to what it would have been had they not moved into social housing. By 12 to 13 years after admission, their annual labor income is approximately EUR 4,000 higher—a 20% increase. A substantial part of this income growth is attributed to a significant reduction in unemployment. For this group, the unemployment rate drops from 25% to 15% following admission to affordable housing.
The paper explores four potential mechanisms behind these results:
- First, subsidized housing units tend to be more centrally located and better connected to public transport than previous residences, enhancing access to local labor markets and improving employment opportunities.
- Second, affordable housing allows residents to invest in human capital, with a higher likelihood of vocational training enrollment observed within one to five years after moving in.
- Third, the high stability of affordable housing arrangements in Germany extends residents’ planning horizons by protecting them from being priced out of the local housing market. This stability increases the returns on firm-specific human capital investment, fostering more stable employer-employee relationships.
- Fourth, object-based housing subsidies may reduce labor supply disincentives associated with tenant-based housing assistance.
These findings underscore that affordable housing can yield benefits beyond simply maintaining housing affordability for low-income households. However, these outcomes depend significantly on the design of housing policies, their interaction with other welfare programs, and the location of affordable housing projects.