Informal housing clearance, housing market, and labor supply

•We empirically test the effect of the informal housing clearance of Beijing, China.•We calibrate a spatial general equilibrium model to capture the effect of an informal housing supply shock in Beijing.•We examine the policy effects of relaxed housing market regulations.•Results show that informal housing clearance brings impacts on both the housing market and the labor supply.•Informal housing clearance lowers the utility of low-skill labor in Beijing, and relaxing housing market regulations can compensate for the decrease in utility levels. Problems with health and safety are associated with informal housing worldwide and have led some governments to respond by implementing clearance policies. However, informal housing plays an important role in providing affordable living space to people with low incomes. Careful evaluation of these informal housing clearance policies and assessment of their impacts is therefore sorely needed. This paper empirically evaluates the effect of the informal housing clearance move of Beijing, induced by an unexpected fire in November 2017. We find that the informal housing clearance move has a significant impact on a city’s housing market, particularly on rents. Further, the informal housing clearance significantly reduces the size of the city’s labor supply in the short term, but as the wage level in the city rises, part of the city’s labor force returns, resulting in insignificant mid- to long-term effects on the labor supply. These effects also extend to the housing and labor markets of the receiving cities. We further build a spatial general equilibrium model with different types of labor and formal and informal housing that considers individual location choices. The model calibration is consistent with the empirical findings. The model simulation shows that in response to the informal housing clearance policy, the utility levels of both Beijing and the receiving cities decrease. We then examine the policy effects of increasing formal housing supply elasticities, the indemificatory housing, and the threshold of entering the formal housing market. We find that increasing formal housing supply elasticity and indemificatory housing while decreasing the threshold of entering the formal housing market can mitigate the increase in rents and decrease in labor supply caused by the informal housing clearance policies, and compensate for the decrease in utility levels.