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Column: How did unemployment come from housing collapse?

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In short, it took nearly all of us to make this happen.

A growing undercurrent of economists is now warning about structural unemployment (a skills mismatch) that leaves millions without jobs.

This led to a question asked by one online commenter, “How did structural unemployment come about from a housing market collapse?” Good question.

The recent recession wasn’t simply caused by a housing market collapse; it was more than that.

The economic unwinding in which we still live required lots of failures. We needed home buyers willing to suspend belief over unrealistic future price growth, lenders unconcerned with creditworthiness, financial engineers unaware of changing risk profiles, a government backing large mortgage buyers, the Federal Reserve maintaining low interest rates, workers skipping out on higher education to take jobs in construction, and millions of households taking on consumer debt in the belief that their home value would rise forever.

So, it would be pretty improbable if after all of this there weren’t a significant number of workers with skills that are no longer in demand. That is structural unemployment. The size of it today, perhaps 2 percent of our workforce, is striking.

There is more to the story.

The economics we learn in high school and college tends to treat the adjustment of markets as a smooth and relatively rapid process. That is true enough for some, but there’s enough imperfection in markets to cause mischief.

The failures of markets have animated much economic research over the past two decades, including your columnist’s humble doctoral dissertation. So what insights might have we uncovered about great recessions and unemployment?

Suppose that financial or housing bubbles breed bubbles elsewhere. These bubbles may be in labor markets for construction workers or in factory work for construction materials or household appliances or cars.

Once one bubble bursts, the others follow suit. I cannot resist explaining these market adjustments the way economists attempt to explain it mathematically. I will use two examples borrowed from the physical sciences.

First, think plate tectonics (the way continents move). Force builds as huge land masses press against one another over long periods of time but is released in an instant. This is an earthquake.

Second, think of punctuated equilibrium in evolution surmised and made popular by Stephen Jay Gould.

Instead of evolution happening slowly and smoothly over time, some great stress or environmental change on species led to rapid evolutionary changes. Once the adaption was finished, the species spent a lengthy time without noticeable change, with the cycle repeating itself, not slowly over time, but in rapid bursts.

Either of these two phenomena can be used to explain (mathematically) why this recent shock has led to a particularly large level of structural unemployment. But we don’t really have to rely on naturalists on these matters.

The economist David Ricardo wrote about this problem 44 years before Darwin and a full century before plate tectonics.

What he observed is what plagues us today, many workers without the right skills facing long bouts of unemployment.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to letters@dailyjournal.net.

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