Labor Market Dysfunction during the Great Recession
September 16, 2011
A new paper by researchers Kyle F. Herkenhoff and Lee E. Ohanian of the National Bureau of Economic Research documents the abnormally slow recovery in the labor market during the Great Recession and analyzes how mortgage modification policies contributed to delayed recovery.
- By making modifications means-tested by reducing mortgage payments based on a borrower's current income, these programs change the incentive for households to relocate from a relatively poor labor market to a better labor market.
- Herkenhoff and Ohanian find that modifications raise the unemployment rate by about 0.5 percentage points and reduce output by about 1 percent.
- This reflects both lower employment and lower productivity, which is the result of individuals losing skills as unemployment duration is longer.
Source: Kyle F. Herkenhoff and Lee E. Ohanian, "Labor Market Dysfunction during the Great Recession," National Bureau of Economic Research, September 2011.
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