Labor immobility

[Daniel Drezner]

Whenever economists of all political stripes compare the U.S. economy to Europe, one of the qualities that is presumed to give America an advantage is our flexible labor markets. Americans are more likely to move to places with better jobs than Europeans.

Which is why Louis Uchitelle's front-pager in today's New York Times is so worrying:

The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer. Or people seek... an escape from harsh northern winters.

Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people... are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring.

The problem isn't just the rapid decline in housing prices, however -- it's the uncertainty about the precise value of houses. Until the housing market bottoms out, potential homesellers will delay going through the Kübler-Ross stages of grief and internalize the loss of their house's value.

Politicians will not help this process -- indeed, a lot of politics is about wallowing in the anger and bargaining phases. As Daniel Gross pointed out in Newsweek about six weeks ago, the various proposals for bailouts and foreclosure freezes accomplish nothing but delaying the proper functioning of the price mechanism:

In general, cleaning up quickly after popped bubbles is good for the economy, because it enables everybody to move on. Over the years the American economic system has proved to be quite adept at doing so. And as Japan's experience in recent years shows, refusing to deal with the overhang of bad debt can condemn an economy to a lengthy period of slow growth. But I doubt there's the political will to allow the fast price discovery allowed by foreclosures to continue. While it would certainly bring long-term economic benefits, the short-term social, financial, and political consequences of a rapid clearing of the housing mess are too much to bear. As the year goes on, expect presidential candidates and government officials to keep throwing lifelines and buckets full of hope at the housing market.

Until people accept current valuations of their houses, they won't sell, which means an increasingly immobile labor force.