Latest in (Lack of) Structural Unemployment, Housing Lock Edition: MacroBlog, CEPR.

I like to keep up with the latest in the structural unemployment arguments.   Melinda Pitts, research economist and associate policy adviser at the Atlanta Fed, recently summarized and provided links for a bunch of the recent work in Gaining perspective on the employment picture:

In a speech given yesterday, Atlanta Fed President Dennis Lockhart addressed some of the underlying issues that have potentially been holding back job growth. On the supply side, President Lockhart addressed three structural issues, including skill mismatch, house lock, and extended unemployment insurance….[1, skills] This comment is motivated by the research of Federal Reserve economists (Valetta and Kuang and Barnichon and Figura, among others) that suggests while there is likely some evidence of skill mismatch, it’s not materially different than what’s been seen during past recessions.

[2, housing lock] Here too, President Lockhart says there is evidence indicating house lock is not a large contributor to the current high level of unemployment (For example, see Schulhofer-Wohl,Kaplan and Schulhofer-Wohl, and Molloy et al.)

[3, unemployment insurance] More convincing is the argument pointing to the impact of extended unemployment insurance benefits. Research from the most recent recession and recovery—for example, see Valetta and Kuang and Aaronson et al.—suggests extended benefits have added to the unemployment rates, with estimates ranging from 0.4 percentage points to 1.7 percentage points. If that’s the case, then President Lockhart says these extended benefits may be acting “as a disincentive to accept an offered job, especially if the job pays less than the one lost.”

It’s good to have all the cutting-edge arguments against this line of argument in one place.  Two quick points before we move along: They only mention partial equilibrium effects of unemployment insurance extensions. It is likely that job creation more or less nets out, raising the unemployment rate but also raising the employment rate.

They also note: “Furthermore, a recent National Bureau of Economic Research study showed that job creation is more correlated to young businesses than the broad class of small businesses. Start-ups and young businesses are often financed in ways other than direct business loans.”  I’m not sure how this fits in, but it is correct that there are fewer new businesses opening, but it should also be noted that new businesses are more likely to fail during this recession (and the previous one). Analysis here:

CEPR

Meanwhile, John Schmitt and Kris Warner of CEPR just released Deconstructing Structural Unemployment, which looks at construction workers and housing mobility in the current recession. They dig into the January 2010 Displaced Workers Survey (DWS) and find:

• Slightly more construction workers (56.3 percent) than non-construction workers (55.5 percent) found a new job at some point between the time they were displaced and the time they were interviewed for the DWS.

• On average, construction workers also held slightly more jobs since being displaced (0.80) than non-construction workers (0.71)…..

The DWS data do suggest that house prices have had some impact on displaced workers’ likelihood to move. Displaced workers in states where the house price index was unchanged or positive, were less likely to stay (84.8 percent) than were workers who lost their jobs in states with house-price declines (87.6 percent in the case of small declines; 87.2 percent in the case of large house-price declines).

Using data from the DWS on the unemployment experience of movers and non-movers, these
differences in the staying rate across states by house-price changes suggest that the overall effect of
housing lock is likely to be small…To put these effects into perspective, at an unemployment rate of 10 percent, for example, increasing the total pool of unemployed by two percent, would raise the unemployment rate to about 10.2 percent….

So, if the housing market in the bottom four-fifths of states had behaved like the housing market in the top fifth of states, and this improved performance in the housing market raised the moving rate in those states to the level observed in the top fifth of states, we would expect the share of displaced workers who were unemployed at the time of the interview to have been only about 0.8 percentage points lower than it was. Since 38.4 percent of formerly full-time displaced workers were unemployed at the time of the DWS interview, this means that “housing lock” might have raised the total unemployment share for displaced workers by, at most, about two percent (0.8/38.4=0.021). While it is difficult to translate these figures from displaced workers to the overall unemployment rate, these numbers suggest that the overall effect of housing lock is likely to be small.

This is good. From more and more sources it seems like “housing lock” is not a major story in this recession. People will rent out their homes or walk away to keep mobility on the table.

I thought this was going to be more a driver.   We’ve noted before that underwaterness is correlated with unemployment (last August):

But the big stories and studies of the past 6 months point to this being less driven by supply-side characteristics, all those construction workers who can’t become nurses and people who can’t move, and more by demand-side characteristics, including foreclosure spillovers, budget retrenchment, and de-leveraging.

Given that foreclosures have yet to peak, and this year will be all about cutting crucial short-term spending without touching the actual long-term deficits of health care, it could be a really bumpy year.

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5 Responses to Latest in (Lack of) Structural Unemployment, Housing Lock Edition: MacroBlog, CEPR.

  1. chris says:

    raising the unemployment rate but also raising the employment rate

    How does that work? Some kind of shenanigans involving the denominator?

  2. K. Williams says:

    “and more by demand-side characteristics, including foreclosure spillovers,”

    Do you have any evidence that foreclosure spillovers (and as I type that I realize I don’t know what you actually mean by it — the spillover effect on other home prices?) are responsible for a meaningful percentage of the increase in unemployment?

  3. Mike says:

    Chris,

    Errr, I meant increasing unemployment rate while also creating more jobs than it discourages. Shouldn’t have used that second “rate.”

    K. Williams:

    The argument is most developed in the paper I link to and walk through here:

    http://rortybomb.wordpress.com/2011/02/14/finally-empirical-evidence-about-how-the-foreclosure-crisis-is-impacting-the-recovery/

    It’s contested, and the mechanism isn’t entirely there, but it’s something that is other than housing lock.

  4. K. Williams says:

    I thought the methodological problems with that Mian-Suffi-Trebbi paper were pretty severe, and pretty much make it impossible to know whether there’s anything at all to their argument. They treat judicial-foreclosure states and non-judicial foreclosure states as similar in every regard except for how foreclosures are done, when in fact they’re not (non-judicial states, in general, had bigger bubbles, and therefore suffered harsher consequences when they burst). And they misclassify two states in terms of judicial/non-judicial, and those just happen to be the two states that dominate their finding that profound differences between the economic outcomes in border counties are correlated with foreclosure laws: http://realestateresearch.frbatlanta.org/rer/2011/02/new-study-foreclosure-house-prices.html.

    I really think this is not a piece of research you should be confidently citing as demonstrating that foreclosure spillovers have a lot to do with the unemployment rate.

  5. Mike says:

    Sure, and I’ve linked to that critique (I mentioned the paper is contested and they don’t have the full mechanism). I wouldn’t put a lot of weight on it empirically as foreclosures qua foreclosures until I see that critique disputed.

    You asked specifically what I meant by spillovers in housing, and they point to the contagion-like balance-sheet effects of the Kiyotaki-Moore model in housing.

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