Myths of structural unemployment: The construction dimension

After feedback from readers, I think it would be useful to provide some context for the Economic Snapshot we released yesterday, What does construction have to do with it? The snapshot showed that very little of the rise in overall unemployment between 2007 and 2011 was due to unemployed construction workers (see the graph below). The data presented are the rise in unemployment compared to the rise in “unemployment other than construction.” In the early aftermath of the housing collapse in 2007, the overall unemployment rate was 4.6 percent, just 0.1 percent higher than if there were no construction sector. By 2011, the overall unemployment rate had risen to 8.9 percent and would have been 8.6 percent without construction. Thus, overall unemployment from 2007 to 2011 increased by 4.3 percentage points (going from 4.6 percent to 8.9 percent) and would have risen 4.1 percentage points without any construction sector (from 4.5 percent to 8.6 percent). Just 0.2 percentage points of the overall 4.3 percentage-point rise in unemployment can be explained by higher than average unemployment within the construction sector.

Unfortunately, some readers interpreted this analysis as denying either the real hardship faced by construction workers or the role of the bursting of the housing bubble on the economy. Neither was the case, so let me provide some context.

There has been persistently high unemployment for many years and a debate about what can and should be done about this. There are some prominent policymakers who believe that there is nothing that monetary or fiscal policy can do to address this high unemployment because the unemployment is mostly “structural,” meaning that there are sufficient job openings but the skills of the unemployed do not make them qualified for those jobs. That means it will take education and training of the unemployed and/or a long period of adjustment until we work our way through a structural change. In this view, neither monetary nor fiscal policy can successfully lower unemployment. One of the main narratives associated with this point of view focuses on construction, an intuitively plausible story (though not actually true):  We built up substantial employment in construction during the housing boom, employment that went to relatively “unskilled” workers, and now that the bubble has burst and substantial job losses have resulted, we are left with a large pool of unemployed construction workers who have not yet found themselves new jobs in other sectors.

Consider the interview in the Wall Street Journal last year with Charles Plosser, the president of Philadelphia’s Federal Reserve Bank. After asking Plosser whether monetary policy can change the high unemployment picture, the interviewer, Mary Anastasia O’Grady, paraphrased his unequivocal response: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. Plosser said:

“You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems.”

In 2010, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said that “a lot” of our unemployment was structural and not subject to influence by Federal Reserve Board monetary policy, specifically:

“Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.”

So, the snapshot addresses the structural unemployment issue these observers raise and shows that the unemployment problem goes way beyond the pool of unemployed construction workers. This in no way diminishes the importance of the bursting of the housing bubble in generating the recession nor the severe employment losses in construction. As I wrote in an earlier paper, “It is true that construction has lost many jobs in this downturn, losing nearly 2 million jobs from the start of the recession through the second quarter of 2010. This accounts for about 25% of all private-sector jobs lost. Is this what’s fueling the unemployment problem? The answer is “No, not at all.””

There were severe job losses in construction and construction has very high unemployment, as it did in 2007. Construction unemployment, however,  did not fuel the rise of unemployment to 10 percent and it does not explain why it currently exceeds 8 percent. We do know that those who lost their construction jobs exited unemployment by either taking jobs in other sectors, leaving the labor force (i.e., giving up) or leaving the country, though we do not know how many chose the particular exit paths. We also know that there would be very high unemployment even if we could set aside the very high and troubling unemployment of construction workers. Solving our unemployment problem is not really about turning construction workers into manufacturing workers (as Kocherlakota suggests) or into nurses (as Plosser suggests). Rather, we need to have more job openings and more jobs in nearly every sector. And a wide array of policies can make that happen, including monetary policy, housing policy, fiscal policy and exchange rate policy. One such federal policy would be to undertake infrastructure projects in transportation and in modernizing schools that would employ construction workers and also generate jobs in related industries as well as throughout the economy as newly employed construction and other workers spend their wages.

  • BenLeet

    If we had the same employment/population ratio as Jan. 2007, 63.7%, not 58.5%,  some 10.8 million more jobs would exist today. If we had the same ratio as Jan 2000, 67.1%, some 20.6 million more people would be working.
    I get e-mails from the Chicago Political Economy Group, and this is a portion of yesterday’s e-mail about the recent Feb. 2012 unemployment report, authored by Joe Persky, a professor at Univ. of Illinois, Chicago: “If we take a longer-run view, this last year has seen an increase of about 2 million jobs, or 166 thousand per month. That is better than the year before and the year before that. But this modest growth in employment is just doing a little better than population growth. The (seasonally adjusted) employment population ratio last January was 58.4%. This January, as noted above, it is 58.5%. In January, 2007 the same figure was 63.7%. At this rate it will take us half a century (52 years) to just get back to where we were before the panic and deep recession took hold. And keep in mind that the labor market in 2007 hardly represented full employment. In that year about 8.5 million workers were unemployed or underutilized by the BLS’s own measure. ”
    1933-1937 the unemployment rate dropped from 25% to 9.6% because of public job creation according to this article by Marshall Auerback:

  • Piddlesworth

    The simplest disproof of the idea that our current unemployment is largely structural is to simply note that addressing structural unemployment can do nothing more than fill already available jobs and, at the moment, there are four people looking for employment in the US for every job that’s available.  Until that drops to two people per job, by definition most of our unemployment will be non-structural, and thus should primarily be addressed through policy that doesn’t depend mostly on matching people to unfilled jobs.

  • Bval

    Looks like higher highs and higher lows, a long term, high unemployment trend until we flush the baby boomers and all those who remembers 1950/60’s wages out of the system.