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.
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.
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.