2.8 Million Construction Jobs Are Missing

In Saturday’s Wall Street Journal Timothy Aeppel wrote an interesting article noting that manufacturing employment has recovered only 22% of the nearly 2.3 million jobs lost during the 2008-2009 recession.  While this is true the U.S. economy and labor market can flourish despite declining manufacturing employment.  In fact, declining manufacturing employment has been the norm in the U.S. for decades.  Manufacturing employment peaked at 19.5 million jobs in 1979.  Since then the manufacturing sector has lost 7.5 million jobs as 53 million jobs were created outside the manufacturing sector.

The decline in construction employment over the past five and a half years, however, is troubling and atypical of recent economic recoveries.  Normally investment in residential housing by households and structures by businesses increases rapidly in recoveries as these investments were deferred and delayed during the recession.  A comparison of the pattern of construction employment in this recession and recovery to comparable periods during and after the 1981 and 2001 recessions reveals some clear patterns:

  • Construction employment declined more than three times as much (26%) during the 2008-2009 recession as it did during the 1981 recession and more than 11 times as much as during the 2001 recession.
  • Construction employment is about 1.7 million (22%) below its pre-recession peak five and one half years after the recession began.
  • Five and one half years after the beginning of the 1981 and 2001 recessions construction employment had increased to about 15% above its pre-recession peak.

The following chart compares construction employment across the 1981, 2001 and 2008-2009 recessions normalizing employment to be 100 at the start of each recession.  The chart tracks construction employment in each recession/recovery for the subsequent five and one half years.

Construction1

The magnitude of the decline in construction employment during the 2008-2009 recession was unprecedented.  The absence of a recovery in construction in employment during the subsequent recovery is also unprecedented.  Had construction employment rebounded over the past few years as it had in previous recoveries, there would be 8.6 million workers in the construction sector instead of the current total of 5.8 million construction employees.  The net difference represents a shortfall of 2.8 million jobs in the construction sector.  Construction employment remains well below the levels of six years ago because businesses are investing less in structures than they did in previous recoveries and the residential housing market has not recovered as strongly as it has in other recoveries.

The shortfall of 2.8 million construction jobs is equivalent to the difference between the current unemployment rate of 7.4% and a 5.6% rate.  Of course, if the economy were strong enough to generate an additional 2.8 million construction jobs there would also be more robust growth in income and employment in other sectors of the economy lowering the unemployment rate even further.

The sharp decline in employment in the construction sector since 2008 and the fact that only 8% of construction jobs have been regained during this economic recovery is extremely troubling.  Construction differs from manufacturing because jobs can’t easily be outsourced to foreign countries.  While manufacturing’s share of total employment has declined steadily for decades, construction’s share of total employment grew steadily for three decades from 1978 to 2008 until the sharp decline over the past five and one half years.  The following chart illustrates the sharp drop in construction employment since 2008.

Construction2

In my view the continued weakness in the construction sector underscores a failed opportunity for those who advocate public investment in infrastructure.  The past five and one half years have seen an unprecedented slowdown in construction activity and employment.  Over two million construction workers lost their jobs in the deep recession and have remained displaced through a tepid recovery.  At the same time we have not chosen to re-build and repair our roads, bridges and infrastructure while there is an excess supply of construction labor and interest rates are low.  Government expenditures have been diverted from infrastructure to other programs such as a record extension of unemployment insurance benefits (over one billion weeks worth of UI benefits have been paid since 2008).

More importantly, the fact that the recession officially ended four years ago yet construction employment remains in a slump is a clear indication of the weakness of this economic recovery.  As the recovery officially enters its fifth year households are still unwilling or unable to purchase new houses and businesses lack the confidence and demand for their products to invest in offices, factories, warehouses and other facilities.  Until the construction sector rebounds because households and businesses are willing and able to invest in structures this recovery will continue to disappoint.

More Quits means the Job Market is Looking Up

This week’s Job Openings and Labor Turnovers Survey (JOLTS) had some good news about the labor market.  The JOLTS survey, which began in 2001, gets much less attention than other BLS reports.  The results released on Tuesday indicate that more private sector workers quit their jobs in the first two months of 2012 than at any point since 2008.  Quits are strongly pro-cyclical.  Workers are much less likely to quit their job if they don’t already have a job offer or they are pessimistic about their prospects for finding a new job.

The JOLTS survey indicates that 3.4 million workers quit their jobs in January and February, up almost 18% from early 2010, when only 2.9 million quits occurred.  The job market still has a long way to go; between 2002 and 2008 an average of 4.8 million quits occurred in the first two months of each year.  In other words, quits are about 29% below their pre-recession average.

Discouraged Workers

The unemployment rate has declined by 8/10 of one percent in the past five months, but part of this decline is due to an increase in the number of discouraged workers rather than unemployed workers finding a job.  Officially, unemployed workers must be jobless and have looked for work in the past 4 weeks.  During the recession and weak economic recovery many unemployed workers became discouraged, stopped searching for work, and are no longer counted as unemployed.  As the economy gains strength they will resume their job search and this could prevent the unemployment rate from falling in 2012 or even cause it to increase.

The excess fraction of the working age population that is jobless is the employment gap.  This gap should be calculated controlling for age, gender and time trend because of differences in the propensity to work across demographic groups.  Adding the number of jobless workers represented by the employment gap to the natural or typical unemployment rate produces an alternative to the official unemployment rate.

The figure below shows employment/population for men age 35 to 44 and 45 to 54 from 1980 to 2011. The ratios for both groups have trended down by about 1% per decade and are about 4% below their trend values as of January 2012.

The “natural” unemployment rate for men age 35 to 44 is probably close to 3.4%, the average rate during the last half of the 1990s and from 2005 to 2007.  If every jobless worker in the 4% employment gap was added to the “natural” rate the unemployment rate would be 7.9% (rather than 6.4%) in January 2012.  Comparing January 2011 to January 2012 indicates that most of the 1.1% drop in the official unemployment rate was due to an increase in discouraged workers rather than a reduction in the employment gap.  The decline in the employment gap over the past year would have reduced the unemployment rate by just 0.4% (8.3% to 7.9%).

Men age 45 to 54 have a “natural” unemployment rate of about 3.2%, the average during the late 1990s and from 2005 to 2007.  The adjusted unemployment rate, which adds jobless workers from the employment gap to the “natural” rate, is 7.2% (rather than 6.4%) in January 2012.  About 60 percent of the 1.9% drop in the official unemployment rate from January 2011 to January 2012 was due to an increase in discouraged workers rather than a narrowing of the employment gap.

The unemployment rate is normally expected to decline as the economy strengthens but this may not occur in 2012.  It appears that much of the decline in the unemployment rate over the past year was due to workers becoming discouraged rather than finding jobs.  The official unemployment rate could increase by 0.8% to 1.5% if these discouraged workers resumed their job search immediately.  It is more likely that discouraged workers will gradually re-enter the workforce keeping the unemployment rate stubbornly high even as the economy strengthens.

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