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There is a significant misconception afoot. It is that our unemployment problem has arisen largely out of the manufacturing sector of the US economy. To be sure, there have been changes there, but the real story is what has happened to employment in the housing and housing related markets which more recently employed about one out of every six employees in the private employment sector.

From 2001 to mid 2005, 43.0% of all new private sector jobs created in the U.S. were in housing or housing related markets. That's astonishing, when you think about it, especially considering the Greenspan Krugman housing bubble developed largely thereafter. But it also explains why, with the housing market in so bad a slump and house prices unable to hold their own, current unemployment remains so high.

As Eric Fisher and Peter Rupert, both of the Federal Reserve Bank of Cleveland, explain in their paper, The Decline of Manufacturing Employment in the United States:

Manufacturing’s share of employment in the United States has been falling for at least 50 years. The share of manufacturing employment in 1950 was about 35% and in 2004, it was about 13% . . . There were 103 million workers in manufacturing and services in the United States in 2001; if the historical relationships from 1986 had held, then there ought to have been 25.4 million manufacturing workers. Instead there were 7.7 million [or 30%] fewer workers.

The authors go on to explain “relatively rapid technological progress in manufacturing had a very strong effect on the decline of employment in manufacturing.” That is machines replaced people. High and rising productivity created much unemployment in manufacturing and where manufacturing employment was not tied to significant technological progress, we simply lost the employment to more competitive workers in other countries.

But the question then is where did those unemployed workers from manufacturing go? Many, if not most, migrated into the housing and housing related sectors, I submit, some drawn there by the federal tax and other laws favoring over investment in housing and some drawn there by the housing bubble. To be sure, some migrated into other parts of the service sector, but not as many as went into the housing related markets.

From 2001 to mid 2005, 43.0% of all new private sector jobs created in the U.S. were in housing or housing related markets. Housing related markets largely took up much of the slack from manufacturing and did so even more as the housing bubble grew and developed.

Viewed differently, why were so many employed in housing, you might ask. The answers are that many displaced from manufacturing found work in those markets; others were induced to leave their employment in other sectors and get on the band wagon with housing when the housing bubble got underway.

Finally, continuing all along, federal policies and laws unduly favored over investment in the housing and related markets and had done so for years. Deductible interest paid and selected deductable closing costs, among other rules and laws, seriously misallocated excessive resources, including employment, to the housing sector, as did the later housing bubble itself. It seemed like everyone and his brother wanted a real estate or contractor’s license.

When the housing bubble burst and Wall Street’s house of cards collapsed, very many in the housing related markets became unemployed. Exact numbers are hard to come by here, but assuredly jobs lost in the housing and housing related markets account for a large portion of the current official unemployment rate of about 10%.

These facts and this analysis have serious implications. Chief among those implications is this: until housing and its related markets materially improve, there can be little prospect of the economy improving and therefore employment improving much. It is no longer the case that as goes General Motors, so goes the country. It is much more, as goes housing, so goes economy and with it, lagged a little bit, employment.

This is not an optimistic outlook, especially inasmuch as the rally in housing prices has now faded and the chance of further housing price declines ahead has increased. These developments, coupled with so much former employment and employment growth tied to housing, makes the outlook for our economy even more ominous at present. I have become more pessimistic because of this background and these developments. The stock market doesn’t seem too happy of late either.

Disclosure: none relevant

Source: As Goes Housing, So Goes the Economy