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Wednesday July 6th 2011

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How much unemployment is structural?

Raghu Rajan cites the work of Erik Hurst:

As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have had the greatest contraction in that industry in 2006-2009. These states also tended to have the largest rise in unemployment rates between 2006 and 2009.

The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians. So, the job losses extend far beyond those in the construction industry.

It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers. Hurst estimates that this “structural” unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today.

This article was originally posted on Greg Mankiw’s Blog