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Geographical reallocation and unemployment during the Great Recession: the role of the housing bust

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Author Info

  • Fatih Karahan
  • Serena Rhee

Abstract

This paper quantitatively evaluates the hypothesis that the housing bust in 2007 decreased geographical reallocation and increased the dispersion and level of unemployment during the Great Recession. We construct an equilibrium model of multiple locations with frictional housing and labor markets. When house prices fall, the amount of home equity declines, making it harder for homeowners to afford the down payment on a new house after moving. Consequently, the decline in house prices reduces migration and causes unemployment to rise differently in different locations. The model accounts for 90 percent of the increase in geographical dispersion of unemployment and the entire decline in net migration. However, despite large effects on migration and geographical dispersion of unemployment, the effect on aggregate unemployment is moderate: Our findings suggest that, absent the housing bust, aggregate unemployment would have been 0.5 percentage point lower.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 605.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:605

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Related research

Keywords: Housing - Prices ; Unemployment ; Geography ; Labor market ; Labor mobility;

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References

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  1. Sam Schulhofer-Wohl, 2010. "Negative equity does not reduce homeowners' mobility," Working Papers 682, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Robert G. Valletta, 2012. "House lock and structural unemployment," Working Paper Series 2012-25, Federal Reserve Bank of San Francisco.
  2. Bart Hobijn & Aysegül Sahin, 2012. "Beveridge curve shifts across countries since the Great Recession," Working Paper Series 2012-24, Federal Reserve Bank of San Francisco.
  3. Lutgen, Vanessa & Van der Linden, Bruno, 2013. "Regional Equilibrium Unemployment Theory at the Age of the Internet," IZA Discussion Papers 7763, Institute for the Study of Labor (IZA).
  4. Valletta, Robert G., 2012. "House Lock and Structural Unemployment," IZA Discussion Papers 7002, Institute for the Study of Labor (IZA).
  5. Aysegül Sahin & Joseph Song & Giorgio Topa & Giovanni L. Violante, 2012. "Mismatch unemployment," Staff Reports 566, Federal Reserve Bank of New York.
  6. Davis, Morris A. & Fisher, Jonas D. M. & Veracierto, Marcelo, 2013. "Gross Migration, Housing and Urban Population Dynamics," Working Paper Series WP-2013-19, Federal Reserve Bank of Chicago.

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