Arnold Kling  

The Construction Sector and the Economy

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Citing work by his colleagues, David Andolfatto writes,

the collapse of the construction sector accounts for 46.4% of the decline in U.S. GDP and 51.9% of the decline in total employment (roughly 3.4 million jobs).

Pointer from Mark Thoma.

There are two important factors in this analysis. One is that his colleagues used an input-output table to estimate the effects of the drop in construction on other sectors. One concern I would have is that a decline in the demand for an input to construction should reduce the price of that input and thereby increase its demand in other sectors. This will not be picked up by input-output analysis.

The second important factor is choice of dates. They look at the period from 2006 through 2010. Over that whole period, construction is a lot of the story. But from 2008 through 2009, it is not as much of the story.

Having said that, I want to believe that construction was a huge factor in the recession. For one thing, it is consistent with Leamer's findings in Macroeconomic Patterns and Stories about earlier recessions. Second, it makes it easier to tell a recalculation story.

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CATEGORIES: Macroeconomics

COMMENTS (7 to date)
Arthur_500 writes:

Working in the Construction Industry I have noted that materials prices have not fallen. Even if you say the prices have to remain steady, in the face of a 46% drop one would find the market flooded and prices should fall somewhat. however, we have seen smaller American Lumber companies dropping out of business.

The Labor side the picture is very intersting. With such a drop in demand for Construction labor we should see a drop in labor costs as more labor becomes available in the market. this has not happened.

I have heard individuals say, "I'm not working for those wages, I'm worth much more." Ignore the obvious - you aren't getting anything today - and the other side of the story is those people are living off of something. Unemployment, I presume.

Construction is a labor intensive industry. With the drop in demand I expect to see faster changes in the industry. For example, more building of entire wall segments and transporting them to a job-site and setting them up. this can be done indoors in any weather with minimal personnel. There will be increased use of power tools and assemblies. In other words, those jobs are never ever coming back. I expect to see a 50% drop in construction labor as productivity levels rise.

With the support of unemployment we are slowing the pace of recovery. Certainly we all want a cushion when we lose our job. However, at some point the individual needs to understand that they will never go back to work in construction and they need to look for new opportunities. Until someone starts to realize this we will not see any recovery of note.

I think this is a re-calculation. It is a re-setting of the construction industry and an opportunity for greater productivity and new methods.

Scott Sumner writes:

A few points.

1. The data cited is not inconsistent with the assumption that the recession is 80% AD.

2. The vast majority of the decline in housing construction (roughly 70%) took place between Janauary 2006 and April 2008. Unemployment rose from 4.7% to 4.9%, because AD declined only slightly.

3. Then AD fell sharply, and lots of construction jobs were lost in commercial and industrial construction, which had been unscathed until the sharp AD decline.

4. Over the last 10 years housing construction has been well below normal. If we had adequate AD we'd have a housing shortage right now--instead we have a seemingly never-ending surplus, despite nearly 3 million more Americans each year. Meanwhile lots of jobless young people live with their parents. We are becoming Italy.

5. If reallocation is the story, why weren't jobs being created (net) in non-construction?

Becky Hargrove writes:

As to your fifth point: In the timeframe that anyone needs to live with their parents their lives tend to be put on hold, because often the parents do not live where the jobs are. So that entire sector often only engages with the economy to a limited degree, until they can move to a place that provides greater economic access.

Bryan Willman writes:

As I pointed out in a comment on Scott's blog a while ago, it's really quite strange to claim that housing was "overbuilt" in a time of rising prices. (Huge oversupply causes prices to go up?)

OK, suppose what we had was "overlending" which has now to some degree been corrected, or more likely overcorrected.

How does the recalculation/reallocation story work if the real "shock" is to lending rather than such basic facts as household creation?
That is, one needs to rethink one's comparative advantage in terms of credit supply for what one produces rather than consumer or employer demand for what one produces?

Steve Sailer writes:

The Housing Bubble was more than just construction: it was home-equity loans, and more consumption due to rising home values. During the Bubble, my barber, for example, spent 20 to 30 days per year gambling in Las Vegas.

Becky Hargrove writes:

Your first point is a big part of what frustrates me, about current housing supply ownership structures. To a large degree, oversupply of housing did occur because of the fact that prices were going up - a cycle that was tough to break because practically everyone was getting a positive piece of the action from the whole process (which included more tax monies at local levels). Now that the game is up, all that positive action has disappeared.

q writes:

for the calculation story to be "true" , wouldn't you need it to account for more than 100% of the total loss in jobs?

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