The Housing Market and Unemployment
The recent unemployment numbers came back with a dismal increase of only 41,000 in private payrolls. The chart below shows changes in unemployment since the start of the recession for all recessions since 1948. As you can see, unemployment in this recession has been particularly slow to recover and got much worse than in prior cycles.
Source: Federal Reserve of Minneapolis (Updated June 4th, 2010)
One of the reasons for the severity in unemployment is the less flexible nature of the labor market compared to prior recessions. A good portion of this inflexible nature arises from, (here we go again) the unintended consequence of the federal government’s goal of increasing home ownership. Workers who would otherwise have been able to relocate for a job are stuck in homes for which they owe more than the home is worth. These workers would have otherwise been renters, or in a home that was not underwater, thus more readily able to move to where the jobs are. In its zeal to help people achieve the “American Dream” of owning a home, the federal government’s housing policies have harmed economic recovery. (For a more detailed discussion on other factors affecting housing and the financial crisis see my previous post, “The Role of Regulation in the 2008 Financial Crisis.”)
For the economy to rebound, consumers need to regain their purchasing power. For that to occur, employment needs to strengthen. Employment is now tied to the housing market, which is in turn tied to the overall strength of the economy and round and round we go. There are indications that the residential market is at or near a turning point, so in keeping with the theme of my last post, I’m optimistic that we will see an improvement in unemployment in the second half of 2010, albeit a very slight and gradual improvement as GDP growth is expect to be less in the second half than the first.
