Labor Market Dysfunction During the Great Recession

Abstract:     
This paper 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. We find that modifications raise the unemployment rate by about 0.5 percentage points, and reduce output by about 1 percent, reflecting both lower employment and lower productivity, which is the result of individuals losing skills as unemployment duration is longer.

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Number of Pages in PDF File: 44

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