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

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  • 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.

Suggested Citation

  • Fatih Karahan & Serena Rhee, 2013. "Geographical reallocation and unemployment during the Great Recession: the role of the housing bust," Staff Reports 605, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:605
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    References listed on IDEAS

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    1. Schulhofer-Wohl, Sam, 2012. "Negative equity does not reduce homeowners’ mobility," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Feb, pages 1-17.
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    Cited by:

    1. Aaron Hedlund, 2014. "Illiquidity and its Discontents: Trading Delays and Foreclosures in the Housing Market," Working Papers 1417, Department of Economics, University of Missouri.
    2. Karahan, Fatih & Rhee, Serena, 2014. "Population aging, migration spillovers, and the decline in interstate migration," Staff Reports 699, Federal Reserve Bank of New York, revised 01 Apr 2017.
    3. Serdar Ozkan & Kurt Mitman & Fatih Karahan & Aaron Hedlund, 2017. "Monetary Policy, Heterogeneity, and the Housing Channel," 2017 Meeting Papers 1610, Society for Economic Dynamics.
    4. Allen Head & Huw Lloyd-Ellis & Hongfei Sun, 2016. "Search, Liquidity, and the Dynamics of House Prices and Construction: Corrigendum," American Economic Review, American Economic Association, vol. 106(4), pages 1214-1219, April.
    5. Lutgen, Vanessa & Van der Linden, Bruno, 2015. "Regional equilibrium unemployment theory at the age of the Internet," Regional Science and Urban Economics, Elsevier, vol. 53(C), pages 50-67.
    6. Bart Hobijn & Aysegul Sahin, 2013. "Beveridge Curve Shifts across Countries since the Great Recession," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(4), pages 566-600, December.
    7. 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.
    8. Valletta, Robert G., 2013. "House lock and structural unemployment," Labour Economics, Elsevier, vol. 25(C), pages 86-97.
    9. John McCollough & Komal Karani, 2014. "The Media's Role in Influencing Perceptions of Housing Values and the Resulting Impact on the Macroeconomy," Economic Affairs, Wiley Blackwell, vol. 34(1), pages 68-77, February.
    10. Gabriel P. Mathy, 2015. "Hysteresis and Persistent Long-Term Unemployment: Lessons from the Great Depression and World War II," Working Papers 2015-02, American University, Department of Economics.
    11. Plamen Nemov, 2015. "Regional Reallocation and Housing Markets in a Model of Frictional Migration," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 863-880, October.
    12. Ay?egül ?ahin & Joseph Song & Giorgio Topa & Giovanni L. Violante, 2014. "Mismatch Unemployment," American Economic Review, American Economic Association, vol. 104(11), pages 3529-3564, November.
    13. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, January.
    14. Sterk, Vincent, 2015. "Home equity, mobility, and macroeconomic fluctuations," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 16-32.
    15. Parkhomenko, Andrii, 2016. "Opportunity to Move: Macroeconomic Effects of Relocation Subsidies," MPRA Paper 75256, University Library of Munich, Germany.
    16. Johannes F. Schmieder & Till von Wachter, 2016. "The Effects of Unemployment Insurance Benefits: New Evidence and Interpretation," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 547-581, October.
    17. Downing, Janelle, 2016. "The health effects of the foreclosure crisis and unaffordable housing: A systematic review and explanation of evidence," Social Science & Medicine, Elsevier, vol. 162(C), pages 88-96.

    More about this item

    Keywords

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

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