This chapter examines the impact of regional skills mismatches and housing market hurdles on the national equilibrium rate of unemployment. The extreme regional disparities created by the crisis are associated with a 1 to 1¾ percentage points higher national equilibrium unemployment rate.
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Prepared by Thomas Dowling, Marcello Estevão, and Evridiki Tsounta.
Summary of forthcoming IMF Working Paper by Marcello Estevão and Evridiki Tsounta (both WHD).
There has been a trend increase in unemployment duration since the 1970s, partly explained by the passage of the baby boomers into their prime working years (Abraham and Shimmer, 2001), although the recent increase driven by the crisis is well beyond levels implied by the documented trend.
Our analysis is based on FHFA house prices given the better geographic coverage; our results remain robust to using Case-Shiller house-price indices.
According to First American CoreLogic (2010), 70 percent of all mortgaged properties were underwater in Nevada at end 2010Q1, while less than 10 percent of the mortgaged properties in New York and Oklahoma had negative equity.
Foreclosure rates are strongly correlated with negative equity measures.
Due to data limitations (the skills mismatch index begins in 1990) our analysis does not shed light on the persistence question, as the recessions of the early 1990s and early 2000s were shallow and did not post the same level of regional dislocation. The natural rate of unemployment has been on a decreasing trend since the mid-1970s (even during recessions), making persistence an important issue for future research.