Housing Construction: Does It Drive Employment?

home under construction

Felix Salmon has a very smart take on Representative Brad Miller’s proposal for the federal government to provide loan guarantees for home builders. He gives Miller a chance to state his case and then provides a well reasoned rebuttal.

All’s well until the last paragraph of his post:

As for the unemployment problem, there’s no doubt that we want the people who have lost their jobs in the homebuilding sector to find new jobs as quickly as possible. But do we want those new jobs to be in the homebuilding sector? Not really. If we’re going to encourage job creation, let’s try to do it in areas of the economy which will help drive exports rather than imports, and which underpin a genuinely strong economy.

Felix doesn’t explain his rationale for this statement so maybe I’m missing something but the statement on its face is contradicted by evidence that homebuilding is a superior driver of employment. Michael Mandel pointed this out in a post earlier this week:

Housing construction, although it counts as investment in government statistics, has much less positive impact on long-term growth than other types of investment.

However,   spending on home construction does have one virtue–most of the money goes to domestically-produced goods and services. A calculation by two BLS economists, Carl Chentrens and Arthur Andreassen  (in  a  paper they presented at the 2009 Federal Forecasters Conference) suggests that only 7% of spending on residential investment ‘leaks’ into imports. By contrast, they find that about 21% of nonresidential investment leaks overseas (that makes sense, since so much business investment goes for IT and transportation equipment, much of which has a heavy import component).

That makes new home construction a much better generator of domestic jobs, in the short-run, than other types of spending.   For example, American consumers went shopping for more clothing in the first quarter of 2010. But that uptick of consumer activity sure as shooting didn’t create many clothing production jobs in the U.S.

So if we want job growth–and we do, we do–it’s  going to be tough to get a job recovery without at least some improvement in the housing market.

Like Mandel and I suspect Felix, I am not a fan of our past heavy reliance on housing construction as a pillar of the economy, but that doesn’t mean we should ignore the benefits of the activity.

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