Daily Archives: 12/23/2010

Are underwater homeowners breaking the Beveridge Curve?


There are two important questions in the economy today that may be related: 1) is negative equity causing a decrease in geographic mobility? and 2) why is the Beveridge Curve breaking down? Wait! Don’t stop reading yet, I can explain it in non-econo-jargon, I promise.

House prices have obviously fallen a lot since the peak of the bubble, and this has left many homeowners “underwater”, so to speak, meaning they owe more on their mortgages than their house is worth. This is potentially causing a big decrease in people’s willingness to move, which includes moving for a job. This, in turn, is potentially causing higher unemployment by preventing people from moving away from places where their labor isn’t demanded to places where it is. The question is, how big of a deal is this?

The second question relates to the Beveridge Curve, which shows the relationship between the unemployment rate and the number of job vacancies. The idea is that when unemployment is high, job vacancies should be low, and vice versa. If people are having a hard time finding work, then employers shouldn’t be having a hard time finding workers, since there are plenty of unemployed people looking for work. However, as the graph below shows this relationship has broken down somewhat over the recent recession. This is suggestive of some sort of friction in the labor markets that is preventing employers from finding hires among the vast numbers of unemployed.

A recent study investigates whether house price induced immobility is causing the breakdown in the Beveridge Curve. This is an intuitive and plausible mechanism.  House prices fall, homeowners are underwater and can’t move to jobs, so there are unemployed people in one area and job vacancies in another, and negative equity prevents them from moving to those jobs. Supporting their hypothesis, the authors cite a 2010 study by Ferreira, Gyourko and Tracy which found that having negative equity reduced the probability that a homeowner would move by 35%.

The study uses a structural VAR (which is a big regression with multiple dependent variables) to estimate the dynamic relationship between 3 housing market variables and 2 labor market variables. They find that their model predicts 30% of the increase in unemployment observed during the great recession, and in generates a flat or slightly upward sloping Beveridge Curve as observed in reality. The authors are then able to run a counterfactual where they removing shocks to housing preferences, meaning that they see what would have happened to unemployment without the housing bubble.  They find that the unemployment rates are in line with the Beveridge Curve, and thus conclude that underwater homeowners can explain the breakdown of the Beveridge Curve. The graphs below show the counterfactual unemployment rates in two scenarios: a high leverage economy, and a low leverage economy.

The authors do caution that their model is a simple one, but the results suggest that housing markets are holding back labor markets. What is also important to note however, is that the model only explains 30% of the increase in unemployment during the Great Recession, leaving plenty of room for aggregate demand led unemployment.

Filed under: Economics, Modeled Behavior

Are underwater homeowners breaking the Beveridge Curve?
Adam Ozimek
Mon, 06 Dec 2010 13:04:39 GMT


Terrorism: Where the right is now versus two years ago

A lot of opposition seems to have cropped up to the newer more intrusive searched in response to the “underwear” bomber.

Those on the right 2 years ago under Bush would have been all for this. To question any intrusion on our freedom if it was in the name of security was to be with the terrorists.

Now the right instead suggest the new airport searches are too intrusive (about friggin time), and suggest a little more willingness to be be lean more heavily on those of Muslim extraction would make this unnecessary for “real” Americans.

Finally the argument is being made that terrorist attacks have increased under Obama.

Color me skeptical but not totally dismissive of these born again civil libertarians. Here are a couple of links. Informed comments are welcome.



Structural Unemployment

Economists do it with models had this to classify unemployment, and especially structural unemployment.

I’ve written about the different types of unemployment before, but let’s recap:

  • Frictional unemployment: the unemployment that happens simply because it takes a worker some time to find a new job after he gets laid off. In a perfect world, firms looking to hire would be circling the airspaces of the firms laying people off like hungry buzzards, but instead workers have to go and actively seek companies out after they finish licking their wounds from having gotten laid off. (Some of you may remember that this process was even more fun in pre-Internet days.)
  • Cyclical unemployment: the unemployment that happens simply because the economy is in the toilet at a particular point in time.
  • Structural unemployment: the unemployment that happens because there is a mismatch between the skills of unemployed workers and the needs of the economy. In other words, this:

    The stormtroopers have two options: They can either retrain so that they have skills that their economy needs or they can be entrepreneurial and figure out how to use their existing skills in a new way that their world is willing to pay for. I feel particularly bad for the specialized stormtroopers, since their skills are less likely to be transferable to new jobs. At least they have a bright future as special guests at ComicCon.

Some evidence on the importance of structural unemployment was provided by this post from a VP at the St. Louis Fed.

Here is a plot of the U.S. BC using JOLTS data. Both job openings and unemployment are divided by a measure of population (16+ civilian). The dots represent the empirical BC and the solid line represents a theoretical BC.

A fairly conventional interpretation of the pattern above is that the U.S. experienced a cyclically-induced increase in unemployment; at least, approximately up until the recession was formally declared ended. These are the blue dots (lying close to that BC line I am forcing into your brain). Since then, something screwy appears to have happened in the labor market. There is evidence of increased recruiting activity, but no evidence of declining unemployment (the red dots).

The post may have more than most would want on the question of evidence, but the key is that there are increased vacancies that don’t reduce unemployment.  That seems consistent with structural unemployment.  It also tempers what we should expect from fiscal or monetary stimulus.

Merry Christmas – PICT2935.JPG

and a Happy New Year!