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March 10, 2012 12:43 PM It’s the Housing Bubble, Stupid!

By Kathleen Geier

Who’s to blame for the recession? The right-wing noise machine has pointed the finger at a bewildering array of targets: everything from burdensome regulations to too-high government spending and taxes to, of all things, the late, lamented (and chronically overworked and underfunded) community organizing group, ACORN. One institution that the right has targeted that has proved an especially popular villain of late is labor unions. In states like Wisconsin and Indiana, where anti-collective bargaining and so-called “right to work” laws have recently been passed, labor unions have been painted as public enemy number one, wreaking havoc on te state budgets and the state economy writ large.

But is the union-blaming story remotely plausible? The body of research on the macroeconomic effects (summarized in this book, for example) of labor unions does not support this explanation; it shows no clear pattern regarding the relationship between union density and macroeconomic benchmarks such as the unemployment rate. Nor is there strong evidence that unionized firms are less productive that their non-unionized counterparts (see Bennett and Kaufman’s book, What Do Unions Do? for a discussion of this issue). Unions do however, raise workers’ wages, improve their employee benefits, and reduce earnings inequality among workers (again, as per Bennett and Kaufman).

The alleged causal relationship between union strength and the Great Recession seems particularly dubious when you consider that unions have been in decline for many years, and that union density rates (currently 12.4% overall, and 7.2% in the private sector) are now among the lowest on ever record. Conversely, during the booming post-World War II economy, union density was at an all-time high; at labor’s peak in the 1940s, over one-third of private sector, non-agricultural workers were in unions.

Need more evidence? Economist Jared Bernstein recently ran some numbers, looking at the relationship between state unemployment rates and other state-level macroeconomic data. Unsurprisingly, he found no relationship between union density and unemployment. What he did find, though, was a very robust relationship between rates of negative home equity (that’s what happens when you owe more on your home than it’s worth) and unemployment. The evidence is compelling: the rate of negative home equity in fact “explains 49% of the variation in unemployment rates across states,” which is very impressive indeed. In short, it’s the housing bubble, stupid!

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

Comments

  • Graychin on March 10, 2012 2:25 PM:

    Does a decline in housing values cause unemployment?

    Or does unemployment cause housing values to decline in the relevant market?

    I would pick the latter.

  • Danp on March 10, 2012 2:30 PM:

    Nor is there strong evidence that unionized firms are less productive that their non-unionized counterparts

    Oh, I think the exodus of jobs to the Mexican border and Southeast Asia might suggest otherwise. When Republicans say they want the US to be "competitive" with China, I'm pretty sure what they mean is they want the same freedon from labor laws.

  • jjm on March 10, 2012 2:55 PM:

    To Graychin: what caused the decline in housing values was that the housing had become wildly over-inflated, due to speculation and E-Z money from lenders who did not really vet the people applying for mortgages, or who let their clients believe that their monthly payments weren't going to rise precipitously at some point when their mortgages adjusted. Even if fully employed, people had borrowed more than they could really afford and began to miss payments, etc.

    The unemployment rise came in great part because with the decline in house prices, people were no longer buying, building and renovating their houses. And without the generous equity lines of credit that the banks were now freezing people couldn't afford to buy materials or hire construction workers, contractors etc.

  • Texas Aggie on March 10, 2012 3:31 PM:

    Dan, I think that your examples don't really touch reality. What you are discussing isn't productivity. What you are discussing is how much of the corporate income goes into a CEO's pocket and how much goes into the workers' pockets. If the references that Ms. Geier cited are referring to production, all that means is that given the same amount of inputs in the form of energy, parts, number of workers and the like, you get as many cars made in a union factory as a nonunion one at similar costs. The difference is where the income goes.

  • Danp on March 10, 2012 4:19 PM:

    Texas Aggie - OK. I'll buy your argument if you define "productivity" the output per person. In terms of dollar efficiency, cheap labor, fewer benefits and limited worker rights yield more output per dollar spent. That's why companies outsource or move to "right to work" states.

  • Rudy Gonzales on March 10, 2012 4:33 PM:

    The Housing bubble was allowed by the Bush administrations with his hand-off approach to business and incompetency while in office. Turning loose the predatory banking industry and killing the legislation that held Banks and financial institutions in check, Baby boy released the hounds to do-as-they-will to the American hen house. Bush was in office and started two unfunded wars after the 9-11 attack and pushed through the Bush tax breaks for the wealthiest Americans. And the current crop of contenders for the TEA-GOP-Republican primary say they want war with Iran, control of women's rights and tirade against the Sarbanes Oxley act of 2002 and the Frank Dodd Act because these two acts provide guidelines and restrictio­­­ns put into place resulting from the recession of 2007 and 2008! There were major corporate and accounting scandals like Enron, Adelphia, TYCO and Worldcom which cost investors billions. The Frank Dodd Act provided a sweeping overhaul of America's financial regulatory system to consolidat­­­e agencies, regulate financial markets, implement consumer protection­­­, provide financial crisis tools for the FDIC and improving accounting processes and tightening credit rating regulation­.