Has the Bad Housing Market Reduced Labor Mobility?, by Kash Mansori: Economists Colleen Donovan and Calvin Schnure have written an interesting new paper examining whether the fall in house prices since 2007 in the US -- which has left many home-owners owing more on their house than it is worth -- created a lock-in effect that depressed labor mobility. ...
The evidence presented in this paper indicates that the fall in house prices has indeed caused a "lock-in" effect, but has not significantly impacted labor market efficiency. Here's the abstract:Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?: The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater”... These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment.
This paper ... finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.
This is a significant piece of evidence against the "structural unemployment" explanation for the US's high and persistent unemployment rate... [T]he underwater mortgage "lock-in" phenomenon that has been cited as the primary reason why the US's labor market suddenly got so much worse starting in 2008 simply does not match the evidence. As a result, if we want to understand why unemployment has been so persistently high in the US since 2008, we have to look beyond "structural" or supply-side explanations. Once again, the far simpler explanation seems to better match the evidence: there's just not enough demand, so businesses aren't hiring, and people remain unemployed.
If the problem is structural, there's not a lot that policy can do to help in the short-run. Social insurance can ease the pain. Government can provide short-term employment to tide workers over, create incentives for both workers and firms to relocate, provide retraining, etc., but these problems take time to work themselves out. However, if the problem is lack of demand, then there is much more that policymakers can do to help the economy get back on its feet. The key is to offset the fall in demand through monetary and fiscal policy measures so that businesses will be willing to hire people again.