Friday, June 8, 2007

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Bad productivity numbers, or just bad numbers?

Last onh I blogged about the puzzling housing sector -- despite output slowing to a crawl, employment in that sector had not abated. Indeed, I made the following half-assed suggestion:

This seems like a peculiar inverse of what was happening in the economy circa 2002-3 -- astounding productivity gains that were not matched by wage or employment growth. One wonders if this means that, for the next year, the U.S. economy will observe the obverse of marginal productivity increases but robust wage and employment growth.
Economically, this makes little sense, but it did seem to be happening.

In today's FT, Krishna Guha looks a little closer at this puzzle:

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....

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....

There are a number of possible explanations.

One is that companies are hoarding labour in expectation of a rapid rebound in the housing market. This looks increasingly implausible as the housing correction drags on.

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. But the slowdown has already been under way for a long time.

New home starts peaked in May 2005. The 12-month rolling average (new starts over the preceding 12 months) peaked at 2.1m in March 2006 and has since fallen to 1.6m.

If it all fails to add up, the 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....

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.

The labour market statistics may also be missing a big decline in work by illegal migrants, who make up perhaps 20 per cent of the construction workforce.

posted by Dan on 06.08.07 at 06:20 AM


Look at: for the looming disaster that is the housing market.

posted by: Bill on 06.08.07 at 06:20 AM [permalink]

Construction workforce? If you are talking about residential, then illegals make up a lot more than 20%. That is part of the reason there aren't more unemployed.

posted by: Joe Klein's conscience on 06.08.07 at 06:20 AM [permalink]

Ding! Thanks JKC. I'm not sure if other parts of the country are any different, but in my part of the southern US I can confirm that it is an open secrect that the private home construction, remodelling and contracting world is predominantly illegal immigrant staffing. It wouldn't surprise me either to find out that many of the larger and medium size manufacturers were dipping into this pool either.

I think a far more interesting study is what happens to this labor pool when the housing demand faucet begins to run dry as it has. Is there a secondary refuge? The landscaping business peaked down here in the late 90s and appears fully staffed.

posted by: Babar on 06.08.07 at 06:20 AM [permalink]

well, when - at mid-day on a weekday - I drive by the grocery near my house, which has been an illegals pick-up point for day labor for several years, there are a LOT more guys still hoping for work than there were a few years ago. So I'm going to guess - anecdote alert! - that there are a lot of illegals working one or two days a week, and sitting in parking lots the other days, than there were at the height of the boom. I have read - actual data here! - that remittances are down, which would support that idea.

posted by: dave.s. on 06.08.07 at 06:20 AM [permalink]

It has nothing to do with illegal labor. Have you ever watched home construction crews "work?" Those guys do as little as possible all day long, if they bother to show up in the first place. This work "ethic" requires lots and lots of extra staffing in order to finish orders in a last-minute frenzy because the crews were loafing the rest of the time. Skilled tradesmen are all union, with all the protection that affords, so it's almost impossible to fire anyone. Crews have to be twice as large as practical because only half of them bother to do anything.

posted by: Useless Sam Grant on 06.08.07 at 06:20 AM [permalink]

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