Greg Mankiw, Ezra Klein, Tyler Cowen and Arnold Kling have all written posts about the speed of labor market adjustment and the employment recovery, noting how much longer the unemployed are tending to stay unemployed in this recession compared to previous ones. Each covers interesting ground, but none touches on the idea I've been most curious about, which is how much of this can be explained by falling house prices and concomitant restraints on labor mobility.
If you look at state-level unemployment rates, you find that the states with the biggest housing bubbles are concentrated at the high end of the chart. And not all of that unemployment is related to job losses in construction, either. Nevada, the state with the highest unemployment rate, has seen a 2.5 percent increase in that rate since May of 2009, meaning that things are still getting worse -- much worse -- long after most of the jobs related to the collapse of house prices were lost.
I think we have to consider the possibility that a policy of sustained unemployment insurance coupled with the administration's foreclosure-mitigation programs is allowing people to pretend they can avoid taking large losses on the sale of homes they can't afford to stay in, and that this is preventing them from taking the loss (or the hit to their credit scores), selling their homes (or sending the keys to the bank), and moving to greener pastures. Theoretically, those policies are allowing underwater borrowers to hold out for a recovery in housing prices that probably isn't coming.
I haven't seen any rigorous recent studies on this, but this one from 1998 suggests that falling home prices put significant constraints on mobility during the 1990-91 recession; according to its estimates, the number of households that moved would have been 24 percent higher after 4 years if housing prices had been rising instead of falling at the rates they did, and 10 percent higher if housing prices had simply remained flat. Suffice it to say that housing prices fell a lot further during this recession than that one.
Again, this would not be the only factor contributing to this recession's unusually long median duration of unemployment: The economy has gotten more complex, making transitions from depressed sectors to booming ones harder; uncertainty, bleak economic forcasts, etc. are preventing companies from hiring. But I think the special nature of this recession, and its roots in the housing sector, also have to be factored in, and the policy implications of keeping the foreclosure crisis in front of us examined.
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