The recovery from the Great Recession of 2007-09 has been so anemic that the average American would probably be surprised to hear that the recession has officially ended. The National Bureau of Economic Research declared that it was over by June 2009, but the economy hasn’t exactly come roaring back. In the 12 months that followed, GDP grew by a modest 2.5 percent, less than one-half of the bounce following the two previous recessions (in 1974-75 and 1981-82) that pundits often compare to the most recent one.
As to the cause of the slow recovery, there has been much finger-pointing: There is too little government stimulus; too much government stimulus; tax rates are too high; tax rates are too low. Erik Hurst, a macroeconomist at the University of Chicago, argues that—in contrast to earlier recessions, when the economy temporarily performed below its long-run capacity—the 2008 recession was a necessary corrective for an economy overheated and distorted by a credit-fueled housing bubble. If Hurst is right, we’re now adjusting to a new normal, one in which there are fewer manufacturing jobs to go around and no housing boom to absorb all the unskilled workers who could have found work in a less globalized and computerized era.
While the recession reduced incomes and increased unemployment across all socioeconomic groups, the poor have been hit harder than anyone else. According to data from the U.S. Census Bureau, the bottom 20 percent of American families earned less in 2010 than they did in 2006, the year before the recession began. Every other income quintile is at least back at where they started, or even a little ahead. For the bottom quintile, this is just the most recent setback in a series of them: Their share of America’s economic pie has been shrinking for decades.
There are two broad shifts that account for much of this decline: globalization and computerization. From T-shirts to toys, manufacturing jobs have migrated to low-wage countries like Vietnam, Bangladesh, and of course China. Meanwhile, many of the tasks that might have been done by middle-income Americans employed as bookkeepers or middle managers have been replaced by spreadsheets and data algorithms.
Hurst notes that fewer and fewer Americans with a high school education or less are finding employment in manufacturing. This is a trend that accelerated in the late 1990s. Some of those lost jobs resulted in twentysomethings exiting the labor force. But a great many were absorbed by a thriving construction sector. Between 1998 and 2007, the share of lower-education men employed in manufacturing fell from 15 to 10 percent, virtually a mirror image of construction, where the share increased from 15 to nearly 20 percent.
The wages of less educated men—which had been in decline since the 1970s—also enjoyed a brief reprieve in the late 1990s and into the following decade. Working with University of Chicago colleagues Kerwin Charles and Matthew Notowidigdo, Hurst found that these aggregate statistics for the United States as a whole have played out in miniature across the country (PDF), as one would expect if the housing boom were really behind the short-lived uptick in the employment and salaries for the bottom 20 percent. In regions where the housing booms were greatest, the employment prospects of low-skilled workers fared the best, while in places that the housing bubble passed by, the job prospects of such workers continued their inexorable decline. (The researchers also found that the increase in construction employment was only part of the explanation: Low-skilled service employment also went up in places with housing booms as local residents, feeling wealthier as a result of the increased value of their homes, spent more at restaurants, barber shops, and local retail establishments.)
Overall, Hurst and his co-authors estimate that roughly 40 percent of the increase in nonemployment (those who are unemployed but still looking for jobs, as well as those who have given up and exited the labor force entirely) since 2007 involves manufacturing jobs that were already lost during the earlier part of the decade. But the loss of these jobs was temporarily obscured by the housing boom that allowed low-skilled individuals to find work. (For the college-educated, there was at most a modest connection between the housing booms and employment.)
Do we expect the jobs that resulted from the housing boom to once again come to the rescue of low-wage Americans? Hurst doesn’t think so. The run-up in home prices that triggered the jump in construction and local spending was relatively short-lived, and home prices have returned to the levels where one might expect them to be, based on the moderate price growth that has prevailed over many decades in just about every state in the Union. In New York, home prices grew at around 2.4 percent a year from 2000 to 2010, once you add up the 5 percent annual growth of 2000-07 and the bust that followed. This is not much different from the 2 percent annual growth that the state experienced from 1980 to 2000. Similarly, Nevada home prices declined slightly over 2000-10 despite the massive housing boom of the first half of the decade, just as they did during the years 1980-2000.
So just as we probably shouldn’t expect home prices to come roaring back, don’t hold your breath for a rapid recovery in employment—a lot of those jobs were already lost before the boom started, as a result of manufacturing’s long-term decline. This presents a bleak future for low-skilled Americans: declining job prospects and wages with no obvious reversal in sight. This isn’t anything new—Hurst and his colleagues emphasize that the housing bubble merely provided a brief respite from this steady drop.
Few economists feel that there’s much hope in propping up manufacturing businesses where they still exist—a lot of those jobs will continue to migrate to lower-wage locales. But at the same time, some leading labor economists are reasonably bullish on the long-term prospects for American workers—if we make the right policy choices to prepare them for the new global economy.