How the U.S. housing boom hid weaknesses in the labor market

The share of workers ages 25 to 54 with a job has been on an overall decline since 2000. This decline hit prime-age workers without a college degree particularly hard, in what is now called the “great employment sag” and during which increased competition from abroad evidently pushed down manufacturing employment. Interestingly, though, this employment sag could have been worse for those displaced manufacturing workers because the housing bubble in the 2000s may have actually helped mask employment losses.

This is the argument made in a new Journal of Economics Perspectives article by Kerwin Kofi Charles and Erik Hurst of the University of Chicago and Matthew Notowidigdo of Northwestern University. The authors believe that the decline in prime-age employment could be due to cyclical factors such as recessions or more structural, long-term trends including globalization and technological change. They cite good evidence that cyclical forces did a lot to depress the employment rate of prime-age workers, but the enduring depressed levels suggest longer-term trends where the importance of manufacturing employment and the share of prime-age men without college degrees becomes clear.

Charles, Hurst and Notowidigdo detail the relationship between share of prime-age, non-college-educated men working in manufacturing, working in construction, and those not employed. The combined share of these three series seems to stay relatively constant at about 50 percent, with increases in construction employment offset by declines in manufacturing employment or declines in non-employment. So perhaps increased demand for construction workers during the housing bubble offset the declines in manufacturing employment.

Looking at trends in employment across metropolitan areas in the United States, the three authors find evidence that the construction industry did end up hiring workers who left the manufacturing sector. Areas with higher housing demand during the housing bubble increased the employment share of prime-age, non-college-educated men. Looking at individual data on workers who were let go from manufacturing firms, the authors find evidence that workers living in areas with stronger housing demand were more likely to be re-employed. The employment sag would have been greater if not for the increased demand from the housing bubble.

The results of this paper support the larger idea that declining employment and labor force participation among prime-age men is primarily a result of declining demand for the types of labor that many of them traditionally provided. If such a long-term structural change in the economy is still at the heart of this change, then U.S. monetary and fiscal policy – policies used to solve cyclical problems – might have a hard time boosting the employment rates of these workers. But some slack does remain in the labor market. Continued support for the current recovery would help in some ways. At the same time, the construction industry could be helped out by investments in infrastructure or policies that encourage housing development in high-need areas. Figuring out how to boost demand for these specific workers remains a key challenge for the U.S. labor market.