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Working Papers

March 2019, No. 19-07R

Local Scars of the U.S. Housing Crisis* (Revised May 2020)

Saroj Bhattarai, Felipe F. Schwartzman and Choongryul Yang

This paper shows that the 2006-09 U.S. housing crisis had scarring local effects. For a given county, a 10 percent reduction in housing wealth from 2006 through 2009 led to a 3.3 percent decline in employment by 2018 and a commensurate decline in value added. This persistent effect occurred despite the shock having no significant impact on labor productivity and only a short-lived impact on household demand, house prices, and household leverage. The authors find that the local labor market adjustment to the housing shock was particularly costly: local wages did not respond, and long-run convergence in the local labor market slack instead took place entirely through population losses in affected regions. These results on population adjustment leading to mean-reversion in local slack extend the seminal observations by Blanchard and Katz (1992) to the effects of a temporary and identified local demand shock. Additionally, the authors show that the housing bust, compared with the housing boom, had asymmetric effects on employment and wages, indicating a role for downward wage rigidity.

* This paper was published previously under the title "The Persistent Employment Effects of the 2006-09 U.S. Housing Wealth Collapse."


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