Housing and unemployment: the connection

Someone driving through my town yesterday commented on the plethora of for sale signs along the main road. It is interesting to speculate on the motives of the sellers.

A need to downsize in retirement? A new job in a new state? Unemployed and out of money? Hoping to trade up now that the kids are older?

All sorts of things get held up when houses don't sell. The Economist finds a link between our lousy housing market and unmployment.

America’s economy is still operating well below its potential and there is little doubt that most of the rise in unemployment is the direct result of this. But unemployment is high for other reasons too—ones largely neglected in the current debate. Thanks to the scale and nature of the housing and financial bust, the labour market has almost certainly become less efficient at matching the supply of jobseekers with the demand for workers.

People saddled with mortgages worth more than their homes are less able to move in pursuit of new jobs.

But housing is not the only problem.

The skills of those out of work—disproportionately low- and medium-skilled men in construction and manufacturing—may not be those that employers now need. Extensions of unemployment insurance by Congress have been necessary but have also reduced incentives to seek work quickly. And long periods of joblessness in themselves make people less employable. All this erodes America’s famed flexibility.

If America’s labour market is less efficient, the country’s “structural” or “natural” rate of unemployment will be higher. The IMF now reckons it may have risen from 5% before the crisis to 6-6.75%. If so, around one-third of the rise in America’s joblessness is impervious to the business cycle and cannot be solved by boosting demand. 

The Economist proposes: Legal changes, such as a revision to the bankruptcy code that allowed judges to reduce mortgage debt, could help. The second line of attack is to overhaul schemes that help workers retrain and encourage them to search for work.

I can't help but think that we'll need to work through a lot of pain before things get better.