Archive for January 2011

 
 

Employment in residential and nonresidential construction during the crash

There’s been a lot of response to my argument that the loss of residential construction jobs did not play a major role in the recession, rather falling NGDP was to blame.  Bob Murphy countered with some graphs showing the level of employment in construction was quite different from building starts (or building completions for that matter.)  But what matters is employment in residential construction, so lets break out the data by category.  I will simplify this BLS data by adding both construction workers and trade workers, since most of the employment on both residential and non-residential structures is trade workers.  (These two categories include the vast majority of all construction workers, the remainder are building infrastructure.)  Here are the totals in thousands:

Category              January 2006            April 2008        October 2009

Residential                3422                        2931                 2172

Non-residential         3204                        3436                 2771

Total                         6626                        6367                 4943

Un-rate                     4.7%                       4.9%                 10.1%

If you look at the total level of construction employment, you see that data that caused Bob Murphy to reject my hypothesis.  Although housing construction was down sharply by April 2008, total construction employment had fallen only slightly.  But that data has no bearing on my claim that the decline in residential employment contributed heavily to the recession.  We need to focus on residential construction jobs.

Even in the residential sector, it is true that jobs fell more slowly than construction activity.  But I’d still argue the data strongly supports my hypothesis:

1.  Almost 40% of the job loss had occurred by April 2008, yet the national unemployment rate remained relatively low.  Those workers mostly found jobs in non-residential construction, or other fields, or in a few cases returned to Mexico.

2.  In mid-2008, economic forecasters were predicting fairly low unemployment for the year 2009, even though they already knew that housing starts had fallen much faster than housing employment.

3.  In mid-2008 commercial real estate prices were still quite strong, despite the fact that residential housing had been declining for more than 2 years.  No spillover was expected.

4.  Then NGDP fell sharply after June 2008.  Even if there had been no pre-existing subprime crisis, one would expect a sharp break in NGDP to severely depress the housing industry.  Not surprisingly, it was after mid-2008 that prices began falling in non-subprime markets like Texas.  Surely a big portion of the post-April 2008 housing downturn was caused by the fall in NGDP.  Australia did not see a decline in NGDP, and did not see a housing crash in 2008-09, despite even more inflated prices.

5.  So nearly 40% of the job losses had little effect on the national unemployment rate, and a big portion of the remaining 60 % were almost certainly caused by the drop in NGDP.  How much of the rise in the national unemployment rate can be plausibly attributed to job losses in housing not attributable to a fall in NGDP?  I’d say well under one percentage point of the more than five percentage point increase in the unemployment rate.  What do you think?

HT:  Marcus

PS.  I can’t get the BLS link to work, they are series CES2023610001, CES2023620001, CES2023800101, CES2023800201.

My flawless post showing a strong job market in 2007

Arnold Kling recently criticized my post arguing that the US job market was relatively strong in 2007 and early 2008.  I cited a low unemployment rate, and a reasonably good labor force participation rate (LFPR.)  Here’s what Kling had to say in response:

I am going to react to three things: Nick Rowe talks about the fact that housing transaction volume is higher when prices are rising; Scott Sumner’s latest attempted swindle; . . .

Scott tries to twist the labor market data to raise doubts that labor demand was weak prior to 2008. I am sorry, but I am using the same labor market indicators that I used years before the crisis, and I think that the decline in labor demand prior to 2008 is pretty evident. See this post.

I eagerly read the rest of Kling’s post looking for all the examples of how I attempted to “swindle” the reader and how I had “twisted” the data, and didn’t find a single problem with my post.  I’ll take that as implying there are no flaws.  Then I checked the post Kling linked to:

So here is, if you will, daughter of LUCY. You take total nonfarm payroll employment and divided it by the population over 16. (This is basically just an employment to population ratio.) Divided each monthly number by the peak value, reached in December of 1999, then multiply by 100. The resulting index behaves as follows:

This differs from my LFPR in several respects.  The LFPR uses population aged 16 to 65 in the denominator, whereas modified LUCY uses all population over 16.  Thus an increase in the number of women living to be 93 does not affect my indicator at all, whereas using Kling’s ratio it indicates (assuming those women don’t work) a loss of jobs.  I also believe the LFPR includes the total number working in the numerator, whereas LUCY uses nonfarm payroll employment.  I don’t object to Kling using this indicator, and never criticized his post.  I’m still a little puzzled as to why he criticized my post.  Perhaps in his next post he’ll tell us exactly how I twisted the data and swindled my readers.

Update:  Not so flawless after all.  There are several versions of the LFPR, some stop at age 65 and some go all the way up to infinity.  The BLS has no age limit.  Commenter Brent explains where the difference between Kling and I probably lies:

Actually, the labor force participation rate published by BLS uses the civilian noninstitutional population aged 16 and over as the denominator. So a 93 year-old woman will be included in the denominator unless she resides in an institution, such as a prison, mental hospital, or nursing home.

The differences between your measure and Kling’s are in the numerators. Your numerator is the number of persons classified as either employed (including the self-employed) or unemployed (that is, actively searching for work). Kling’s numerator is the number of wage and salary jobs“”that is, people with second jobs are counted twice and the self-employed are not counted at all.

The statistics suggest that second jobs grew pretty rapidly during the 1990s and declined during 2000s. It isn’t clear to me whether these changes were driven more by shifts in labor demand or in labor supply. At any rate, for the purpose of discussing missing jobs, I think people are usually thinking of primary jobs rather than second jobs, so I prefer your measure.

PS.  Just to be clear, I was not arguing that the job market in early 2008 was as strong as in 2000, just that it didn’t seem nearly as weak as the Jim Tankersley article I linked to had suggested.  I think it is quite possible I am wrong, but I’m still waiting for a commenter to successfully refute my post.

The real problem is multiple problems

This is a meta-analysis of my blogging.

Adverse economic shocks seem to be distributed somewhat randomly.  A priori, you’d expect them to occasionally occur in close proximity, especially if one problem might help trigger another.  When we have the bad luck of seeing two or three big adverse shocks back to back, we can get a major economic disaster.

My research on the Great Depression convinced me that it was two depressions, occurring one right after the other.  A demand-side recession that began around September 1929, and a supply-side depression that began in July 21, 1933 (with another demand shock in late 1937.)  Because they occurred back-to-back, most saw them as one “Great” Depression, and looked for explanations of what caused “the” Great Depression.  No mono-causal theory has proved plausible.

I thought of this recently because of my posts arguing the housing vacancy “problem” is actually two problems, or maybe three.  First, we built too many houses in 2002-06, perhaps due to bad regulation, or maybe bad private sector decisions.  Two other factors increased house prices; low interest rates caused by the tech crash (not easy money), and rapid immigration.  Those two reasons are “good” reasons for a housing boom.  So the housing boom was not good or bad, but partly good and partly bad.

The vacancy problem is also multifaceted.  Partly it was the bursting of the housing bubble.  Partly it was the slowdown in immigration.  And a big part was the huge drop in NGDP relative to trend, which drove unemployment much higher for young first-time home buyers.

And then I realized that my other blogging has a similar pattern.  The financial crisis was really two crises.  The first was caused by lots of foolish sub-prime lending, and led to a bailout of Bear Stearns.  The second was caused by a sharp fall in NGDP after June 2009 [Update: I meant 2008], and led to the failure of Lehman.

The recession itself is complex.  The initial part of the recession (after December 2007) was caused by both a drop in housing construction, and a drop in auto output as a result of soaring gas prices.  It caused RGDP to be flat in the first half of 2009.  Then a completely different problem occurred in late 2008, when tight money drove NGDP and RGDP much lower.  Even the recovery is complex, with the slow recovery being mostly attributable to weak NGDP growth, but also to unusually pronounced wage rigidity triggered by 99 week UI and a 40% minimum wage rise.

So that’s my shtick.

When I read others I often see what looks to me like overly simplistic views of these problems; “the” Great Depression, “the” financial crisis, “the” housing glut, “the” Great Recession, etc., etc.  But here’s the great irony.  I think others see me as the guy with the one-size-fits-all mono-causal explanation for everything.  Mr. NGDP.  Here’s Tyler Cowen, expressing what I think is the prevailing view of my blog:

I believe that the prominence and persistence of “demand-only” theorists in the blogosphere (DeLong, Krugman, Sumner, and others) give blog readers quite a skewed picture of the actual debate.

I see supply-side labor market problems as being a bit more important in this recession than Krugman and DeLong.  But on the other hand my view of the cause of the drop in NGDP is probably much more focused on monetary policy, whereas they’d give more weight to financial distress, fiscal policy, etc.  That’s what makes me seem so mono-causal, I view monetary policy as being “the” determinant of NGDP growth, more so than almost anyone else.

BTW, when I said that I often see others as offering mono-causal explanations for big problems, I’m excluding most of the best bloggers—especially Tyler Cowen, who is quite open to multiple perspectives.

Part 2:   Immigration

Speaking of multiple problems, Adam Ozimek sent me a post and an article where he discusses how immigration could improve the job market, and indicated Matt Yglesias had done similar posts.  Last year I argued that the immigration crackdown in 2007 might have contributed to the housing slump, but didn’t have much to say about policy implications.

I don’t think it’s realistic to have housing needs drive our immigration policy, but I agree with Ozimek and Yglesias that more immigration would help.  My general view of immigration is that it’s a good thing; indeed I agree with Will Wilkinson that it’s the best anti-poverty program out there.  (It’s ironic that the 1965 immigration bill isn’t usually considered part of LBJ’s “War on Poverty,” given that it was just about the only part of the war that was highly effective, maybe more so than all the rest combined.)

FWIW, I’d recommend increasing immigration enough to raise our population growth rate to Australian levels (2% per year), and I’d diversify to match the world’s population distribution.  That means more Africans and especially Asians, and fewer Mexicans.  I have nothing against Mexicans, and indeed personally I’d benefit more from half of our immigrants coming from Mexico, than a huge upsurge from Asia.  I’ll retire in LA where low-cost Mexican labor raises living standards for upper-middle class people like me.  In contrast, at the recent AEA meetings most of the job candidates we interviewed were Asians.  So they compete with US-born econ professors.

I see two advantages to diversifying immigration:

a.  There will be more political support as it will be seen as fairer–less focused on groups that directly compete with America’s unskilled workers.

b.  It will create more cultural diversity.  Many conservatives worry about a dual culture (Anglo/Latino) creating friction, and eroding America’s traditional culture.  Many Asians (and some Africans) get well-paying professional jobs, and blend into American culture pretty well.  I’m not saying Latinos don’t eventually do so, but the large concentration of Mexican immigrants in certain areas frightens cultural conservatives.

If we are to have a big increase in immigration we’ll have to deal with the opposition of low wage workers and cultural conservatives, and this is one way.

NGDP and sticky wages

When NGDP growth falls 8% below trend, revenues also fall 8% below trend.  Or much more than 8%, if you are a state like California with a fiscal regime all leveraged-up like a hedge fund.

But public employee wages and pensions do not fall 8% below trend, creating massive fiscal deficits.  One solution is to have the Fed bring NGDP all the way back to trend.  That won’t happen, and indeed at this point I’m not sure it should.   What did happen is that after mid-2009 NGDP growth continued to fall further and further below trend, worsening the fiscal situation of state governments.  Inevitably, you eventually end up with the following:

Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”  [New York Times]

That’s right, 2 1/2 years after NGDP started plunging, states are “readying” an attempt to bring their costs in line with falling NGDP.  Still think wages aren’t sticky?

The Times also had this interesting tidbit:

Meet the new banking system, same as the old banking system

And then there is this article:

Oregon was one of the few to buck that trend. Last January, voters approved a temporary increase in taxes for individuals making more than $125,000 a year and on couples whose income exceeded $250,000. An editorial in The Wall Street Journal later stated that these rates caused thousands of upper-income residents to flee the state, but studies revealed that a large majority simply made less money, and so fell beneath the income cutoff for the higher rates.

If I was a twenty-something high tech worker in Portland making 60k to 80k, I’d certainly expect to make over 125k at some point in my career.  Thus I’d move up to Washington where there is no state income tax.    And I’d do it now, not when in my 40s with kids in the public schools.

Another example of how income distribution data is misleading.

Bob Murphy wrongly assumes I won’t peek

I recently made this argument:

Yes, housing output was low in 2009 and unemployment was high.  But is there a causal relationship?  I say no.  Housing starts peaked in January 2006, and then fell steadily for years:

January 2006 “” housing starts = 2.303 million, unemployment = 4.7%

April 2008 “” housing starts = 1.008 million, unemployment = 4.9%

October 2009 “” housing starts = 527,000, unemployment = 10.1%

So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes.  Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate.  Then NGDP plummeted, and housing fell another 480,000.

Bob Murphy responded:

The reason is that there’s more to the construction sector than simply starting new houses. That fact alone buys us another few months, as a look at housing completions shows.  [he has a link here]

But more important,

Waaaait a minute.  Note how Bob tells me housing starts are the wrong data, because construction workers keep working for some time after the starts, and then tells us to look at housing completions.  But then he merely provides a link, moving right along to something “more important.”  I wonder why?  Perhaps because housing completion data also supports my view?  Here are the numbers.  I’ve also averaged the two, as the average of starts and completions might be a good indicator of ongoing activity.

January 2006:  starts 2,303,000   completions 2,058,000    average  2,180,000

April 2008:   starts   1,008,000    completions   1,014,000     average   1,011,000

October 2009   starts    527,000     completions   745,000    average   636,000

Using the housing activity average, an even greater share of the total slowdown occurred between 2006 and 2008, when unemployment was stable, and an even smaller share occurred after April 2008.  I want to thank Bob Murphy for further strengthening my argument.

Bob also makes another argument, citing data showing that construction employment declined much less than housing construction between 2006-08.  But that’s easy to explain, as commercial real estate prices didn’t peak until late 2008.  So the commercial RE sector may have picked up some of the workers laid off from building houses.   (I don’t know about infrastructure and government building.)  And even if commercial RE didn’t add housing workers, if housing is half of all construction then a 20% decline in housing construction jobs would translate into only a 10% decline in all construction jobs.  All this of course supports my point.  The big drop in housing construction between January 2006 and April 2008 did not cause a significant impact on the US unemployment rate.  Doesn’t that suggest that those housing construction workers weren’t able to find jobs in other forms of construction, or other activities?

BTW, economic forecasters knew about the drop in housing starts by April 2008.  What sort of unemployment rate did they then predict for 2009?  I’d guess not to high, which indicates economic forecasters probably agree with my view that the housing downturn was not likely to severely impact our unemployment rate.

By the way, commercial RE did eventually decline sharply, as you’d expect when NGDP falls at the fastest rate since 1938.  But that’s not a re-allocation issue, it’s an AD issue.  It does explain, however, why the sharp drop in total construction jobs did lag the sharp drop in residential construction activity.