Businessweek: Underwater Homeowners Will Work For Lower Pay
More than one in five borrowers have underwater mortgage loans—they owe more than their homes are worth. This causes financial stress and emotional pain, but new research shows that underwater mortgages may also cause homeowners to work for less money. In a working paper from the Federal Reserve Bank of Atlanta, researchers Chris Cunningham and Robert Reed found that all things being equal, having an underwater mortgage causes a 5 percent to 9 percent decline in real wages.
The paper is based on data from 1985 to 2003, but the researchers say it helps explain a perplexing aspect of the current recovery—that corporate earnings have rebounded while wage growth has been weak. If so many homeowners have underwater mortgages—and therefore are not as demanding—employers can hire them for less. The paper finds that for every $10,000 a homeowner’s mortgage loan is underwater, he or she tends to accept 0.7 percent lower pay. The paper doesn’t make clear if this is for unemployed workers looking for a job or for current workers either taking pay cuts or switching jobs.
Click here to read the full article.