Many Americans have blamed the housing bubble and ensuing 2007-10 financial crisis for persistently low employment, but research suggests the situation is more nuanced than it may seem. The housing bubble temporarily masked a long, steady decline in manufacturing jobs—and it diverted young workers away from the path to long-term employment.
"You're left with a labor market that has been deteriorating not just since the beginning of the Great Recession, but actually for several years before that," says Chicago Booth Assistant Professor Matthew J. Notowidigdo. He conducted the research with Chicago Booth Professor Erik Hurst and Kerwin Kofi Charles of the University of Chicago Harris School of Public Policy.
The researchers analyzed labor and housing market data from 2000 to 2011 for 237 large US metropolitan areas, looking at 21–55-year-olds without a four-year college degree. For this group—which account for about two-thirds of the population—employment in the 2000s was a decade-long seesaw ride, as joblessness fell and rose in cities impacted by the housing boom.
The authors show that the boom disguised a declining number of manufacturing jobs. Between 2000 and 2007, a 5% drop in the share of men working in manufacturing was masked by a 5% increase in the share of men working in construction. This masking effect, visible in the aggregate, is observable even on an individual level. The data show that, in city after city, a man who lost a job in manufacturing picked up a job related to the housing boom, often in construction.
The housing boom also buoyed employment for women, a group with only negligible representation in construction. It's not clear where the increase in jobs occurred that employed women, but Notowidigdo points to health care, financial services, and real estate as likely candidates. "We suspect it's some combination of all those," he says.
All told, a marked increase in housing prices had a significant but short-lived effect on local employment. Were it not for the housing boom, roughly 1.3 million workers who were jobless in 2011 would have been out of a job even earlier—in 2007, say the researchers.
But although the data indicate that the housing boom had a positive effect on the labor market, once the dust settled, related jobs returned to roughly pre-boom numbers. And the boom had more subtle harmful effects: ongoing research indicates that, during the boom years, many recent high-school graduates, seduced by the sudden glut of well-paying jobs, chose work over community college. Yet when the boom ended and jobs evaporated, those same men and women didn't go back to school, and still haven't, creating a hole in educational attainment for a large swath of the population. "That could be very costly to the country," Notowidigdo says.