Sunday, October 24, 2010

A Structural Imbalance in the US Labor Market


Nobel Laureate and US Fed nominee Peter Diamond may underestimate the structural imbalance in the US labor market engendered by the housing crisis ( 'Lack of demand blamed for US jobs level', Financial Times Oct. 18). Prof. Diamond's assertion that "The central focus of the problems in the economy right now is not that the labor market is working badly but the demand for labor is way down” is certainly correct – as firms are operating at below full capacity and a high percentage of workers are searching for work – but it leaves out three key facts about the US labor market.


First, in his speech on October 15th 2010, Fed Chairman Ben Bernanke stated that "somewhat more vacancies are reported than would usually be the case given the number of people looking for work".


Second, as documented by the US Census, internal migration has, over the past two years, slowed to its lowest level on record.


Third, unemployment in construction exceeds 25%. Most of these workers lack skills in other areas.

A Population ‘Stuck in Place’


Internal migration is an important feature of the US labor market, as evidenced by the large movements of population out of the industrial Midwest and northeast towards the Sunbelt and the outflow of population from international immigration gateways like New York and Los Angeles to the interior of the US. Over the past 20 years over 15% of the US population changed its place of residence annually and nearly 4% of moves have been out of state. Currently, the migration rates are less than half the historic norm.


The slowdown is directly attributable to the decline in house prices and the scarcity of home mortgage financing. These forces impede the ability of households to sell their existing homes and to finance the purchase of a new home. The result is a population stuck in place.


The excessive level of vacancies cited by Mr. Bernanke is, at least in part, the result of this geographical mismatch created by the impediment restricting households' ability to relocate to places where there is an excess demand for labor possesing thier skills.

A Skills Mis-match

Spikes in unemployment fall most heavily on unskilled labor and construction workers have a low level of education attainment. That, combined with the collapse in construction activity, accounts for the high unemployment rate in construction.


But the likelihood that the construction share of total employment has been permanently reduced gives rise to a question of which industries will absorb the excess construction labor; this has a sectoral, wage and geographic dimension.


The short answer is that the unskilled construction labor will be absorbed in other sectors at lower wages, since the demise of construction has increased the relative supply of unskilled labor. And because the new jobs will likely arise in the traded goods sector, which places them in direct competition with offshore firms, the wages will be more exposed to offshore competition than they were in the non-traded construction sector, which will compel domestic employers to locate in states with flexible labor markets, where costs are lower. This will accentuate the shift of population out of the unionized upper Midwest into the Sunbelt. But so long as the population remains ‘stuck in place’, this adjustment cannot occur and there will be a growing mis-match between vacancies in the Sunbelt and unemployment in the Rust Belt.

The Housing Collapse Created a Structural Imbalance in the Labor Market

The housing crisis, by restricting the geographic movement of population, has created a structural imbalance in the US labor market.

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