The urban labor market in China has been affected by tremendous changes at the turn of the century. The state sector reform was speeded up after the Chinese Communist Party’s 15th Congress held in September 1997 by encouraging both the corporatization of large SOEs and the restructuring of small SOEs. Moreover, the same Congress recognized private enterprises as an important component of the economy and stressed the rule of law. The direct consequences of these changes on the urban labor market have been the unprecedented growth in unemployment and the reallocation of labor from the public to the private sector.
Whereas employment in the public sector rose continuously up to 1995, it started decreasing in 1995, with a huge acceleration in 1998, the pivotal year in State-owned units reforms (-18% for this only year). Since then, the number of workers in both state-owned units and urban collective enterprises has kept decreasing, from 144.6 million in 1995 to 83.3 million in 2002, representing a decrease of 42 percent. In terms of employment share, the public sector share dropped from 83% to 55% over the period. In contrast to the downsizing of the public sector, the private sector share in urban employment increased from 17% in 1995 to 44% in 2002.
With the housing bust and foreclosure crisis of 2008, much attention has been focused on the relationship between mortgage servicers and delinquent mortgage borrowers. Specifically, the focus has centered on negotiations, or the lack-thereof, between these two parties in the period between delinquency and the initiation of foreclosure proceedings. During this period, the servicer has the option to forego filing foreclosure proceedings, and to instead adjust the terms of the mortgage contract in a manner that increases the probability of future repayment. This process is called modification, and a mortgage servicer, acting on behalf of a profit-maximizing mortgage lender will make this decision by weighing the expected costs, which include the costs of foreclosure (such astaking possession of the house, fixing any property damage, and re-selling the property) against the expected benefits, which include an increased likelihood of repayment by the borrower.
To-date there have been very few modifications, relative to the number of foreclosures performed. As a result, there has been an outcry on the part of policy makers, consumer advocacy groups, as well as some prominent academic economists, who believe that there are not enough loan modifications being performed by the private market. They point to the presence of institutional frictions in the mortgage securitization process as one explanation for this discrepancy. The perceived frictions relate to the incentives that servicers face when passing mortgage payments through to the ultimate investors. As a general rule, servicers are paid a regular fee for every mortgage they service in a given month. Absent any restriction on their activities, servicers would thus have an incentive to keep troubled loans active no matter what, by making large and indiscriminate modifications that would favor borrowers who faced little probability of default. Such modifications, of course, would also reduce the income to the investors, so the legal agreement between the servicer and lender, called the pooling and servicing agreement (PSA), prohibits this type of behavior. As a general rule, PSAs allow servicers to make modifications, but only in cases where default is likely and where this can be shown with a net-present-value calculation.
Negative economic shocks can have long term effects on individuals. Displaced workers face potentially lower future earnings, reduced access to credit, as well as higher mortality rates (Oreopoulos et al. 2006; Schmieder and von Wachter forthcoming; Sullivan and von Wachter 2009). College students who graduate during bad economic conditions are likely to suffer from long term wage losses compared to their luckier peers (Oreopoulos et al 2006; Stevens 2008; Kahn 2010). However, for youth who are facing the decision of graduating from high school, acquiring post secondary education, or entering the labor force, the impact of high unemployment on schooling decisions is theoretically ambiguous, and may be beneficial (Gustman and Steinmeier 1981; Dellas and Koubi 2003; Bedard and Herman 2008). While the opportunity cost of attending school decreases during periods of bad economic conditions, the financial means available to fund education are likely to decline as well.
