Construction Workers: Why a sharp drop in unemployment is not good news.

Commentary about business and finance.
Aug. 15 2011 6:28 PM

The Construction Workers Have Left the Building

Why a sharp drop in the unemployment rate for builders isn't good news.

Illustration for Mark Alan Stamaty. Click image to expand.

Since the beginning of the year, something extraordinary has happened in one of the sectors hardest hit by the recession: Unemployment has dropped by more than a third among construction workers. In January, the unemployment rate in construction was a whopping 22.5 percent. By July, it had fallen to 13.6 percent. Few other major employment sectors have seen such a dramatic change, let alone a positive one, in the same time period.

Those statistics might seem astonishing given the stubbornly high unemployment rate and anemic pace of jobs growth in the last year or two. (What the White House—or, more to the point, America's jobless workers—wouldn't give to see the broader unemployment rate drop that sharply!) Alas, the statistics are somewhat misleading. There has been no real recovery in construction. The falling unemployment rate is a sign of a still-ailing industry, not a newly thriving one.

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Indeed, investment in and spending on new houses, office towers, bridges, and roads remain at almost generational lows. In May 2003, about three years before the frothy top of the housing bubble, Americans were spending on construction at an $872.5 billion annual rate. The same month this year, about five years since the top of the bubble, that rate was $772.3 billion per year. Looking at the total value of construction projects done in a given year, we are building at a slower pace than we did in 2000. Looking at the total value of residential construction, we are building about what we did in 1994.

So why has the unemployment rate dropped so much—from a high of 27.1 percent in February 2010 to 13.6 percent last month—if the industry is ailing so badly? The answer is that since the beginning of the year, construction workers have fled the industry. Each unemployment rate has a numerator (workers looking for jobs) and a denominator (workers looking for jobs and workers with jobs). The number of workers with jobs in construction has remained fairly stable over the last 18 months. Looking at seasonally adjusted data, in February 2010, it was 5.5 million. Last month, it was 5.5 million. (At its peak, April 2006, that number was 7.7 million.) It's the number of workers without jobs that has fallen, from 2.4 million in February 2010 to 1.1 million last month.

Where are all those hundreds of thousands of construction workers going? We cannot say with absolute certainty, as the government does not track individual workers over time, following them in and out of and through the labor market. But the short answer is: somewhere else.

Commercial real estate investment has ticked up only slowly. The construction of new houses and apartment buildings remains anemic. Funding for infrastructure investment, supplied by the American Recovery and Reinvestment Act, the stimulus bill, has dried up. In response, some proportion of construction workers has stopped looking for jobs, perhaps going on disability or retiring early, leaving the labor market entirely. And some proportion, probably larger, has decided to seek work in different, growing fields. The Associated General Contractors of America notes, "Unemployed workers are leaving the industry at seven times the rate they are finding jobs in it."

In the case of residential construction, there are signs that many workers have simply picked up and left the country. Economic Policy Institute economist Heidi Shierholz notes that during the housing boom, homebuilders often hired undocumented workers, workers who might be less inclined to stay put and wait for work. "Despite facing greater job losses, male foreign-born non-citizen construction workers are less likely than their native-born counterparts to get stuck in unemployment for long periods," she reported in a research note this month. "Evidence suggests that this is at least partly because foreign-born non-citizen construction workers who have been laid off are more likely to leave the construction labor force—often by leaving the country entirely—instead of remaining unemployed for long periods."

But the story is not entirely a bad one. The upside is that this is a fantastic time to start construction projects and to hire construction workers, even if the pool of available employees seems to be shrinking. Even  given the surge of infrastructure-investment projects funded by the stimulus bill, the United States still needs to upgrade its bridges, dams, railways, and roads. The American Society of Civil Engineers calls our infrastructure " embarrassing," giving it a D grade overall in its 2009 report card. It is calling for $2.2 trillion in spending over the next five years, $1.2 trillion more than allotted. That would translate into better roads, schools, and waterways. It would also put hundreds of thousands of idled construction employees to work.

The timing makes sense. Financing is cheap. Workers are plentiful and eager to work. There is little private investment to crowd out. For those reasons, the White House has of late renewed its call for an infrastructure bank and major infrastructure projects, leveraging the tax dollar to do the work while it is still relatively inexpensive.

And there might be a silver lining for workers specializing in housing construction, too. Some economists, such as Karl Smith at the University of North Carolina and Brad DeLong at the University of California-Berkeley believe that we have pulled back on housing investment so much that we'll need to catch up with new buildings and renovations soon.

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