Long term unemployment and the ownership society

To grasp the general similarities in the pattern of business cycles is a critical part of economic understanding and foresight, but it is also important to look at the particular historical circumstances and trends that make each business cycle unique.  An example from the recent recession is the way housing and labor markets are interacting to exacerbate long-term unemployment. 

Flexible labor markets are one of the most critical factors in speeding economic recovery.  As the structure of production adjusts to new economic conditions, labor needs to be free to flow between industries and geographic areas.  Otherwise, if laid off workers don’t get to where the jobs are, long-term unemployment sets in. 

Tragically this is what’s happening today (and to a lesser extent during the previous “jobless recovery”).  Decades of chronic oversubsidization aimed at pushing homeownership above the level that would make economic sense have left many unemployed and locked in to underwater mortgages.  Recent analysis of Census data shows that work force mobility within the US has declined dramatically and the number of long-term unemployed is approaching a record high.      

These trends are clear reason to expect a dampened economic recovery and protracted high unemployment, particularly if the policy response continues to include maintaining, and even expanding, the flawed subsidies for residential real estate.