Labor Market Allocation
by Amir Kermani
Why has the current recovery in Europe and the United States been so sluggish? Particularly, why has employment been so slow in picking up, and why do some European countries, such as Greece and Spain, continue to experience Great Depression levels of unemployment? Data from 20 European countries shows that the countries that accumulated higher levels of household debt during the boom years of the 2002 to 2008 also saw the highest increases in current account deficits, consumption, and employment. Yet, during the bust period following 2008, these same countries saw the sharpest decreases in consumption and total employment, while their unemployment rates and current account balances increased. Motivated by these patterns in the data during the boom-bust cycle of the 2000s, this project aims to paint a comprehensive picture showing the relationship between capital flows, household debt, house prices, and employment (specifically in the non-tradable sector). The project will also show how the ease or difficulty with which labor can flow from the tradable to the non-tradable sector and vice versa can impact recovery length and medium and long-term prospects for an economy. Preliminary results using an individual-level panel of German workers which tracks workers over their life cycle shows that workers lose a high fraction of their wages upon moving out of the non-tradable sector to the tradable sector.
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