Thursday, May 1, 2014

Construction Employment, Return to Normalcy, and the Crisis

Paul Krugman posted this Fred graph on Tuesday.  (He included just the construction unemployment rate.  I have added the broader unemployment rate for reference.)

I noticed that, after 5 years of stair-stepping down, construction unemployment has finally reached normalcy.  (Strangely, Krugman's reason for posting the graph was to justify public infrastructure spending, because: "It also wouldn’t divert labor from other uses: unemployment among contraction (sic) workers remains high: So it’s deeply irresponsible NOT to spend this money...".  Weird.  There might be ways to make that argument, but this graph doesn't seem like it's one of them.)

I noticed that the peak of construction unemployment this winter roughly matched the peak construction unemployment of 2004-2005, when unemployment was around 5.5%.  This is another great sign that unemployment is closer to full recovery than it might first appear.

Then, I looked at construction employment, and this is what I saw.  Total employment is just now surpassing the previous peak.  But, even though construction unemployment is back to normal, construction employment is still more than 1.5 million below the peak.  That accounts for most of the remaining excess unemployed workers...except that they aren't showing up as unemployed construction workers.  So, almost all of the decline in construction unemployment seems to have come from labor transitions to other industries or out of the labor force.

The extreme behavior of construction employment has been a point in the structural vs. demand debate.  This would appear to be a point scored for the structural side.  But, I don't think it necessarily is.  For starters, construction employment is still down at 1997 levels, and I don't think most supporters of the theory that we had too much construction would say that the proper level is back at 1997.  But, further, it seems plausible to me that the sharp liquidity crisis that the Fed created along with the resulting credit crisis coming out of the crippled banking sector, could have been especially damaging to a sector that relies on long term investments and a liquid and functional credit market.  I'm not sure it's so easy to separate supply and demand effects into nice, separate baskets here.

It will be interesting to see if construction employment accelerates, if we see a return of growth in real estate loans at the commercial banks.  Surely, construction is due, at this late date, for a rebound.

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