The FT this morning returns to the topic of the US labour market and the recent productivity performance. As they say:
A conundrum in construction lies at the heart of a US jobs market puzzle that continues to baffle economists – including officials at the Federal Reserve. After a year of sub-par growth unemployment is a mere 4.5 per cent. With jobs growth strong but output growth weak, productivity looks very poor.
Most economists think about these questions in whole-economy terms. But much of the explanation may lie in the single sector at the heart of the housing-driven slowdown: the US construction industry.
During the past year residential construction activity has plunged, but employment in this sector has hardly declined at all – at least according to the official statistics.
The FT itself offers three possible explanations for this conundrum:
a) companies are hoarding labour in expectation of a rapid rebound in the housing market. As they say his looks increasingly implausible as the housing correction drags on.
b) there is a time lag in construction and big job losses are just around the corner. Again following the FT, there may be some truth to this, but the slowdown has now been under way for quite a long time, and construction is normally a sector where employment levels respond quickly to changes in activity.
c) the official statistics may not be accurately capturing what is taking place in an industry that employs both a large number of small subcontractors and a large number of illegal immigrants.
The favoured explanation here at Bonobo would be the third one (although there are undoubtedly a number of factors at work.
Indeed, as highlighted in this post, there is some supporting evidence for this hypothesis in terms of the decline in the number of border crossings, and the decline in the volume of remittances being sent home. Both of these could be seen as proxies for the levels of employment of migrant labour.
So it seems that traditional methodologies may now be far from capturing the complete picture, and in something as important for the whole global economy as the US housing slowdown. How times have changed.
The FT cites David Seiders, chief economist at the National Association of Home Builders, to the effect that the BLS assumes that contractors’ hours rise and fall with those of residential building workers, whereas builders in practice let their contractors take the pain when business is slack, and ruefully notes:
If he is right, the decline in productivity in construction – and across the whole economy – may be smaller than the official statistics suggest.
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