Housing Booms and Manufacturing Busts: Hidden Job Loss in the U.S.

While we are all aware of the housing boom and subsequent bust of the 2000’s, and its negative effects on employment and the economy at large, few realize that the housing boom of the early 2000’s hid large declines in manufacturing employment which occurred simultaneously. Economists estimate that the U.S. economy lost 3.5 million manufacturing jobs between 2000 and 2007, although the effect of these job losses were largely hidden by the boom in housing.

In a recent paper, “Manufacturing Busts, Housing Booms, and Declining Employment: A Structural Explanation” by Kerwin Charles, Erik Hurst, and Matthew J. Notowidigdo, the authors identify the decline in manufacturing jobs during the early 2000’s as a major cause of the current level of unemployment in the U.S.

Typically, the loss of 3.5 million manufacturing jobs would depress wages and increase unemployment among low-skilled workers. However, after examining cross-city variation in manufacturing declines and housing booms during the 2000-2007 period, the authors found the opposite:  employment created by the housing boom more than offset declines caused by the loss of manufacturing. In fact, wages stabilized or increased for displaced workers, and unemployment rates declined.

However, the positive effects of the housing boom were only temporary. The housing bust of 2007 revealed the manufacturing sector’s weakness, as unemployment increased and wages declined. Since 2007, the negative economic effects of the housing boom have disproportionately affected non-college-educated men: unemployment rose 8.6 percent during 2007-2011 for these workers — a much higher rate than would have been predicted by the loss of 3.5 million manufacturing jobs during that period.

Despite the popular conception that the housing bubble is mostly to blame for our current economic woes, the authors argue that the sharp loss of manufacturing jobs  in the early 2000’s was a major cause of unemployment, especially among low-skilled workers. They state:

“roughly 40 percent of the increase in [un]employment between 2007 and 2011 can be attributed to the decline in manufacturing employment that occurred within the U.S. during the 2000’s.”

Charles, Hurst, and Notowidigdo’s work invites further inquiry into the policy implications of the weakness in manufacturing employment within the U.S. Policymakers grappling with the legacy of the “great recession” should take a hard look at the decisions and trends, which brought us to where we are today. As the saying goes, if we do not understand the past, we are doomed to repeat it.

Feature photo: cc/HVargas