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Krishna Guha on the Construction Employment Conundrum

In the FT:

FT.com / World / US & Canada - Construction jobs cloud US productivity : 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 Bureau of Labor Statistics payroll survey shows total construction employment and residential construction employment down just 2 per cent year on year in May, the latest month for which figures are available.

The absence of the expected drain of net job losses in construction is the single biggest reason why overall job gains remain so strong – 157,000 in May – and unemployment remains so low. This has come as a big surprise. Even the generally upbeat Federal Reserve was expecting tens of thousands of net job losses in construction to hold down overall jobs gains and result in a gradual moderate rise in unemployment. With activity down, but employment and hours worked little changed, measured productivity in the construction industry has collapsed since last summer. Strip out this sector, and the rest of the economy’s productivity performance looks significantly less bad.

There are a number of possible explanations. One is that companies are hoarding labour in expectation of a rapid rebound in the housing market.... Another is that there is a time lag in construction and big job losses are just around the corner. There may be some truth to this.... [T]he answer may be that the official statistics are not 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. Specialty trade contractors – who work for small subcontracting firms – account for nearly two-thirds of all construction jobs. These workers tend to belong to small, often informal businesses. The payroll survey is likely to understate the extent to which these workers have switched from the residential sector to fast-growing commercial construction.

David Seiders, chief economist at the National Association of Home Builders, says 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. If he is right, the decline in productivity in construction – and across the whole economy – may be smaller than the official statistics suggest. “What we are seeing may be under-employment rather than unemployment,” he says. The separate BLS household survey does show a 300,000 increase in the number of people working part-time for economic reasons over the past year...