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Thursday, November 07, 2013

New Research in Economics: The Effect of Household Debt Deleveraging on Unemployment – Evidence from Spanish Provinces

Sebastian Jauch and Sebastian Watzka "find that around 1/3 of the increase in Spanish unemployment following the housing boom is due to household mortgage debt deleveraging. This is strongly at odds with the EC estimates of the NAIRU"

Download Jauch-Watzka:

The Effect of Household Debt Deleveraging on Unemployment – Evidence from Spanish Provinces, by Sebastian Jauch and Sebastian Watzka: Introduction Spanish unemployment has risen from a low of 7% in 2007 to its height of 26% in 2012. Around 6.1 mil. people are currently unemployed in Spain. Unemployment rates are particularly high for young people with every second young Spaniard looking for a job. Given the enormous economic, psychological and social problems that are related with high and long-lasting unemployment, it is of the utmost importance to study the causes of the high increase in Spanish unemployment.
In this paper we therefore take a close look at one of these causes and study the extent to which the increase in Spanish unemployment is due to the effects of Spanish household debt deleveraging. Using household mortgage debt data for 50 Spanish provinces together with detailed data on sectoral provincial unemployment data we estimate that over the period 2007-10 around 1/3 of the newly unemployed, or a total of approximately 860,000 people, have become unemployed due to mortgage debt-related aggregate demand reasons.
The underlying transmission mechanism investigated in this study begins with a deleveraging shock to the balance sheets of individual households. The shock for households is greater if they must direct more effort to restructure their balance sheets. The more debt a household has accumulated relative to its income before the shock occurred, the more deleveraging the household must arrange by increasing savings and reducing spending after the shock to restructure its balance sheet. Given the elasticity of employment with respect to demand, these deleveraging needs will increase unemployment. ...

    Posted by on Thursday, November 7, 2013 at 07:55 AM in Academic Papers, Economics | Permalink  Comments (2)


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