Persistently High U.S. Unemployment Rate Linked to High Household Debt

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Persistently High U.S. Unemployment Rate Linked to High Household Debt

Why is the unemployment rate staying so high, years after the recession officially ended? If we knew the answer to this question, we’d have a fighting chance at addressing the problem.

In our national economy of 300 million people, it’s not easy to tease out what’s keeping the unemployment rate so high so long. But one just-published study caught my eye because it gives an answer that seems to make sense. It takes a creative look at the connection between high household debt and the unemployment rate.

Now it may sound like common sense to say that if the bottom drops out of a population’s most valuable commodity—their homes—so that their debts exceed their assets, these people are either going to have much less money to spend or be less comfortable about spending money they have. So the goods and services they are no longer buying means unemployment for whoever was providing those goods and services.

But some argue that there are other more important causes of high unemployment. One example is the “argument that businesses are holding back hiring because of regulatory or financial uncertainty.” Another one is that shifts in the global market require unemployed people to retrain, keeping unemployment high while they do so. All of these theories seem to make some sense, but the point of economics is to figure out which of these is really the cause. Or if all three contribute to unemployment, economists are supposed to calculate how much each one does.

So this study determines that high household debt, especially mortgage debt, is the primary reason for unemployment, causing at least 65% of the current unemployment.

Before the start of the Great Recession there was huge variation across the country in the amount of household debt, tending to be highest where the housing prices had climbed the most. For example, the household debt-to-income ratio in California was 4.7 while in Texas was only 2.0. This study looked closely at the differences in employment losses in high- and low-debt counties, distinguishing between losses in employment sectors primarily catering to the local population—such as local restaurants, personal services—and those with a national base—such as manufacturing, call centers. Unemployment rates in the local employment sectors were much worse in the high-debt counties than the low-debt ones, whereas unemployment rates in the nation-based employment sectors were similar in both high-debt and low-debt counties.

Although this may sound somewhat commonsensical, these results did not support other possible justifications for the persistent high unemployment. The study results did not support that jobs were not being created because of governmental or economic uncertainty (think Washington deficit reduction stalemate or the Eurozone crisis) or because of a retraining time gap.

Instead “weak household balance sheets and the resulting  … demand shock [that is, overleveraged consumers not having or spending money] are the main reasons for historically high unemployment in the U.S. economy.”

This seems to mean that high unemployment will be with us as long as a large percentage of homeowners are underwater on their homes. Is anybody in Washington even working on this problem?