Report

Bursting of the housing bubble has not generated any noticeable increase in structural unemployment

“Some economic observers argue “structural unemployment” has increased in the wake of the Great Recession” write John Schmitt and Kris Warner in Deconstructing Structural Unemployment published by the Center for Economic and Policy Research.

Structural unemployment refers to unemployment that reflects supply constraints in the economy: workers whose skills or geographic location don’t match with employers’ desires. Structural unemployment differs from cyclical unemployment, which is associated with fluctuations in aggregate demand related to swings in the business cycle.

The distinction between structural and cyclical unemployment has crucial implications for economic policy. If unemployment is “structural” then government policy that seeks to increase demand – low interest rates or fiscal stimulus, for example – will have little or no effect on the national unemployment rate and could even make matters worse by igniting inflation. If unemployment is “cyclical,” however, then expansionary macroeconomic policy can lower unemployment substantially with little or no risk of inflation. We find little support for either of two arguments that suggest that structural unemployment has been on the rise. The first argument focuses on the large increase in unemployment among construction workers. According to this view, the large supply of unemployed construction workers will never find work in construction again and lack the skills needed to find new jobs in other sectors of the economy.

Based on data from the January 2010 Displaced Workers Survey (DWS), the experience of construction workers, however, is remarkably similar to workers displaced from other sectors.

Slightly more construction workers (56.3 percent) than non-construction workers (55.5 percent) found a new job at some point between the time they were displaced and the time they were interviewed for the DWS.
• On average, construction workers also held slightly more jobs since being displaced (0.80) than non-construction workers (0.71).
• Construction workers also appear to be more geographically mobile than non-construction workers. About one-in-ten construction workers had moved to a different city or county after being displaced (10.3  percent), compared to only about one-in-twelve nonconstruction workers (8.5 percent).
• Construction workers were also more likely to “move to look for work or to take a different job” (6.1 percent) than workers displaced from other sectors (5.1 percent).
• Displaced construction workers were only slightly less likely to be employed at the time of
the DWS interview (46.7 percent) than displaced workers from other sectors (48.2
percent).

Displaced construction workers also appear to be as willing to accept pay cuts as workers displaced from other sectors. Nearly the same share of displaced, formerly full-time construction and non-construction workers (38.1 percent for construction, 38.4 for nonconstruction) who were re-employed at the time of the  DWS interview had taken a pay cut of more than 20 percent at their new job.


The DWS data suggest that the “bursting of the housing bubble – the central cause of the economic downturn and the ensuing financial crisis – has not generated any noticeable increase in structural unemployment.”

Construction workers have indeed suffered disproportionately in the downturn, but they have also been at least as successful in coping with the hostile labor market of recent years as workers displaced from other sectors. Construction workers’ skills are at least as well matched to the available jobs as workers displaced elsewhere in the economy.

The downturn in the housing market also appears to have had no measurable effect on the geographical mobility of displaced workers, but the economic effects are small, raising the pool of the unemployed by only a few percent (and the unemployment rate, by a much smaller amount).

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