Thursday, January 13, 2011

Rajan's take on unemployment

Booth Chicago finance prof Raghuram Rajan has a recent column in the Guardian concerning unemployment.  I found the following excerpt interesting:

In the last boom, construction jobs expanded significantly, with investment in housing as a share of GDP increasing by 50% from 1997 to 2006. As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have had the greatest contraction in that industry in 2006-2009. These states also tended to have the largest rise in unemployment rates between 2006 and 2009.

The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians. So, the job losses extend far beyond those in the construction industry.

It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers. Hurst estimates that this "structural" unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today.

Obviously our employment situation is still far from healthy and this research indicates that it may take a very long time for the excess labor force from housing and housing-related jobs to be redelpoyed elsewhere. 


  1. Dr. Allen, Gregory Mankiw posted on his blog an email from Erik Hurst regarding Rajan's take on his preliminary data. In this quote, Hurst addresses Rajan's conclusion that up to 3 percentage points of total unemployment can be attributed to construction:

    "Raghu reported that we are finding that upwards of 3 percentage points of total U.S. unemployment can be explained by structural forces. That is not what we have found. Preliminary back of the envelop calculations suggest that upwards of 3 percentage points of the unemployment rate in high unemployment rate states like Nevada or Arizona may be due to structural forces – not 3 percentage points of total U.S. unemployment."

    Just thought I'd post,

    Brandon Alexander

  2. Brandon:

    Thanks for the clarification. That's what I guess for relying on journalists' summaries of academic studies.