Housing has been booming! Construction jobs haven’t. Here’s why.

March 19, 2013

Here are two numbers that anybody who wants to understand the job market should look at: Builders started work on 27.7 percent more homes in February than they did a year earlier. Yet the number of construction jobs in the United States was only 2.9 percent higher, year-over-year.

Housing is finally coming back. But the construction jobs isn’t. Why is that happening, and when might it change? A deeper dig into the data by economists at Goldman Sachs gives some answers. And it boils down to two words: Labor hoarding.


When will more homebuilding mean more jobs? (REUTERS/Kevin Lamarque)

The latest news on housing Tuesday was consistent with the sector's sunnier picture. The Commerce Department said that builders started work on 917,000 homes (at an annual rate) in February, a bit more than the 915,000 forecasters had expected. Some of the details report were even better: The number of starts for January was revised up to 910,000, from the 890,000 rate of home construction previously estimated, and the number of permits issued rose even more sharply, a 4.6 percent gain to 946,000 annualized units. It seems increasingly plausible—even probable—that the developers will start work on more than 1 million homes in 2013 (though that’s not as impressive as it sounds; by many estimates, it takes more like 1.2 million homes a year to keep up with the longer-term demographic trend).

And it’s also without question that a full rebound in construction would work wonders for the overall job market. If construction employment returned to December 2007 levels, that would add 1.9 million more jobs. If the number of unemployed fell by that much (without any change in the size in the labor force), the unemployment rate would be 6.5 percent instead of 7.7 percent.

Key to understanding the sluggish growth in construction jobs is a concept called “labor hoarding.”  That’s what happens during a recession when companies don’t fire as many workers as the decline in business would seem to have justified. Firms don’t want to lose all their quality workers and then be unable to keep up with demand when business finally turns around, so they keep people on staff even when there is not enough work to keep them fully busy.

This seems to have happened on a large scale in construction in the last few years. Kris Dawsey and Hui Shan at Goldman's economics research group calculated that the economic value added per construction worker fell from $80,000 in 2006 to under $60,000 at the end of 2012. That is labor hoarding in a nutshell.

But because construction companies never fired as many workers as the collapse in their business would have justified, that means that over the last year, they haven’t needed to hire additional workers to keep up with the uptick in business.

The main question for construction jobs in the future is whether this process has run its course. That is, do construction companies still have excess capacity, or have things strengthened enough that they now will need to hire to keep up with demand. Here, Dawsey and Shan see some reason for optimism. They point out that average hours per week worked in the construction sector has risen rapidly over the last couple of years, and is quite near 40 hours (it was about 37 hours back in 2010). Translation: Builders can no longer keep up with higher demand simply by working existing employees for longer (at least without paying costly overtime wages). We should be at a point where more construction business translates to more construction jobs.

Source: Goldman SAchs
Source: Goldman Sachs

But how many? Dawsey and Shan have done some regression analysis to better understand the relationship between homebuilding activity and jobs. And here, the numbers point to improvement but not at the pace one might hope for. If residential investment spending rises 14 percent this year, which is Goldman’s forecast, it should translate to only about an extra 25,000 to 30,000 jobs a month.

In a world of 12 million unemployed, that’s not much. It would imply something north of 300,000 extra construction jobs this year—a year in which the federal spending cuts known as sequestration are poised to suck more than twice as many jobs out of the economy. (The Congressional Budget Office predicts it will subtract 750,000 jobs in 2013.)

Translation: In order for housing and construction to fully offset the negatives dragging on the economy and support a rise in employment, we'll need to see much stronger growth than we have so far.

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