When IMF experts put the United States’ so-called “structural unemployment” under a microscope they find that the large majority of this is the result of the massive of wave foreclosures and underwater mortgages and only a small part is related to skills/education mismatch.
The real problems are far more likely issues of TARP not having created a cramdown provision, second-liens being over-valued on the stress test and community groups like ACORN fighting against foreclosures being under-funded and under attack, not that we aren’t ‘shocking’ teacher’s benefits or getting a pair of pliers and a blowtorch and getting medieval on the minimum wage’s ass or whatever feverish dreams constitutes our elite’s thoughts about the unemployed lucky duckies.
Let’s back up. Ryan Avent is disappointed. Disappointed that the discussion on unemployment, which includes Arjun Jayadev and I’s latest paper: The Stagnating Labor Market, isn’t sophisticated or taking structural unemployment seriously enough.
He would like us to address things like the IMF’s select paper on the United States, The Great Recession and Structural Unemployment. So let’s do that. This paper looks to analyze structural unemployment by regressing a “skills-mismatch index” (SMI), which quantifies mismatches on education level. as well as regressing foreclosure rates on unemployment rates.
They find that structural unemployment is 1%-1.75%, with skills being 0.5%. That means housing hurdles run from 0.5% to 1.25% of unemployment. So that means the large majority of structural unemployment is housing related.
In my defense, we already did this test at the blog here. We ran a regression on deeply underwater homes against unemployment, similar as the IMF but with what I think is a superior instrument but felt uncomfortable including the numbers in my paper (more on that in a second). The chart:
Now we had numbers, but I wasn’t comfortable including analysis larger than the MSA area. Also we had a problem with whether or not what we were testing was mobility rather than mobility bundled with other issues. Arjun and I constructed an ugly data-set trying to merge MSA-level moving van rentals (the IRS’ mobility data isn’t available yet for previous year) with county level housing data and it didn’t merge well.
The reason I liked deeply-underwater as opposed to foreclosures is that it deliberately blurs the line between can’t move (structural), neighborhood foreclosures (asset depreciation) and Koo-style balance-sheet recession (higher debt in higher LTV neighborhoods), which in practice blurs the line between rigidities, demand and debt.
But no, we ended up not putting this in our paper and instead saving it for a future paper, electing to throw a graph up at the website. Now since the IMF already did this, let’s go deeper. This paper shows that a large majority of structural unemployment is the result of underwater mortgages and foreclosures. In addition, when foreclosures are added into the regression alongside SMI, SMI loses some of its value, and when a cross term is added skills loses a bit more. Right now, the story is one of foreclosures.
So groups that fight foreclosures, say what many over-worked and under-paid community organizers do now, are groups that fight to reduce structural unemployment for everyone. Same with those trying to get cramdown and right-to-rent and better short sales. Which is a worthwhile thing to be doing.
Bonus: Let’s say that Bank of America drove a truck full of chemicals into a town square and proceeded to burn the chemicals. The toxic fumes of these chemicals caused a statistically significant number of workers to be so sick that they ended up not able to work and detached from the labor force and forced major costs onto municipalities. We’d tax the hell out of BoA for burning those chemicals, right? Externalities and all that.
So let’s replace “burning toxic chemicals” with “foreclosures.” It’s the same story. Especially foreclosures that haven’t been reviewed by a judge, or foreclosures where there wasn’t proper representation or where a right-to-rent or modification was available. So why aren’t we taxing the hell out of foreclosures?