Here are some of the thoughts from other analysts about why reported residential construction employment has not been plummeting.
First, a reminder of the basic puzzle: residential construction employment, as measured by the BLS nonfarm payroll estimates, has fallen very little, despite a tremendous drop in the number of new residential units completed:
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Calculated Risk offered this list of possible explanations:
- The BLS has not counted illegal immigrants working in construction.
- The BLS Birth/Death model has missed the turning point in employment, and therefore the BLS has overstated the current number of residential construction employees.
- Some construction employees have moved from residential to commercial work, but they are still being reported as residential construction employees to the BLS.
- Some companies are “hoarding” workers for the expected recovery.
- Many workers are still employed, but they are working far fewer hours.
To this list two more might be added from Econbrowser readers. Steve suggests that many construction workers are now employed with home improvements, while Ray Stone identifies this additional problem with the BLS estimates:
The average private sector establishment paycount per the BLS sample is about 82 workers, but from the QCEW data it is only about 13. The BLS attempts to correct for this in the so-called “Probability-Based” sample by assigning weights to individual respondents, effectively weighting smaller respondents more heavily than larger respondents, to account for the mismatch of sample vs. universe. My sense is that it is nearly impossible to gauge employment is the very small firms (i.e. 1 to 4 workers, and 5 to 9 workers). From the Q3-06 BED data it is apparent that the most acute weakness in payroll growth was in the smallest establishments.
There was also a useful discussion about possibility (1) at the WSJ’s Real Time Economics Blog:
Douglas Lee: First, there is an implicit assumption… that illegal workers aren’t reported on payrolls. That assumption may be incorrect. In 2005 GAO did a study of funds paid to social security that could not be matched with the workers. They found nine million records with the same social security number– all zeros, 3.5 million records where employers used the same social security number for multiple workers, and 1.4 million records with social security numbers that had never been issued by social security. The top two industries where these problems appeared were restaurants and construction. Employers have a big incentive to report earnings and withhold taxes, but practically no reason to verify the correctness of social security numbers. While it is clearly true that many illegals work in construction, where is the evidence they aren’t counted on payrolls?
Second, if they aren’t counted on payrolls now, they also weren’t counted on payrolls in the past.Peter Hooper:
I think it is a reasonable point that some of these illegals are captured in the payrolls. As we note in our report, the net upward revision of more than 200,000 for construction workers over the past five to six years is consistent with the likelihood that some of them were being captured in the QCEW [Quarterly Census of Employment and Wages]. But there are other reasons to think that the payrolls are still missing a big chunk. Payrolls show 150,000 job losses in residential construction from the peak and virtually no net losses in overall construction. Unpublished data from the household survey indicate that 300,000 Hispanic construction workers have lost jobs since the peak, so either the payrolls are missing something, or a lot of non-Hispanics are being hired to take their places. But why would there be hiring in residential construction with the level of construction activity down 25% over the past six quarters? We worked through the other possible explanations, and still come up with a major puzzle, which leads us to believe that the PEW’s estimates don’t look too bad. And I think we establish room for undocumented workers to have been hired on the way up as well as fired on the way down.Douglas Lee:
There is no question about the payroll survey mystery, but I remain skeptical that illegals are the bulk of the explanation.
I’ll put in my vote with Calculated Risk:
I think the answer will be a combination of these explanations.
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I suspect that builders were hiring illegals preferentially on the way up, taking on no more legals than they absolutely had to, but on the way down have been laying off the illegals first, as the legals otherwise would and could more easily seek revenge.
At first I was inclined to suspect the birth/death model was missing a turning point. But this would also impact the income data and imply that the income data is being overstated. But when you look at retail sales as well as income and business tax receipts it is hard to believe that the income data is being overstated.
As a consequence I am inclined to give a lot more weight to CR’s reason number 1 –the illegals were never counted in the first place.
“nine million records with the same social security number– all zeros, 3.5 million records where employers used the same social security number for multiple workers, and 1.4 million records with social security numbers that had never been issued by social security.”
This may be irrelevant, but how do they get away with that stuff? Why doesn’t the IRS prosecute them (employers and employees for tax fraud?
Yes, the illegals were never counted in the first place is another possiblity. The “real” cuts have not even began for the most part. The fake Buffet rumor is a sign of desperation and builders may be ready to bankrupt in impressive numbers. That will, most likely, begin the surge lower. It also explains the “Mexican crying song” of dying money back to Mexico.
I was told by a contact of mine inside the RE industry, this is just like the 80’s but on a more impressive scale. That boom peeked in late 86 but it wasn’t to later in 89 that the RE industry and its industries closely related began laying off even though the industry had been in decline for almost 3 years. We are seeing a similiar pattern now as hiring in RE and its related industries has frozen but no cuts in jobs.
That is called “staving off the beast”. Usually doesn’t last. With RE and its closely related industries making up 23% of the US economy, 5-7 million jobs are to be released.
I have a lot of (legal) friends in the building industry and they are all seeing brisk business.
It’s possible that we really aren’t experiencing any decline in this industry, because homeowners who previously couldn’t find contractors to upgrade their house (they were busy on the more desirable longterm house construction contracts). Now it’s possible to get contractors to bid on your “small” kitchen remodeling.
Bellanson
Have you thought that construction companies might had been working with a lot of over time and part of the adjustment is only due to the adjustment of hours worked per employee?
If thats the case, the income of the employees in the construction sector has already come down.
What do you think about that?
A Sample wrote:
I was told by a contact of mine inside the RE industry, this is just like the 80’s but on a more impressive scale.
The 1980s RE crash was caused by congress changing tax policy. This decline is being caused by the FED.
BLS reported on July 6 that payroll employment in residential building and residential specialty trades combined fell 3.5% from the first quarter of 2006 to the latest three months (April-June), while Census data released on June 29 show residential construction spending fell 20% (through March-May 2007). Conversely, BLS reported that nonresidential building and specialty trades employment rose only 3.5%, even though private nonresidential spending (an approximation of nonresidential building spending) rose 21%. One possible explanation for the discrepancy is that many of the residential specialty trade workers, such as electricians, plumbers, wallboard installers and masons, are now doing nonresidential work but are still counted as residential construction workers, based on the industry code their employers used since first reporting to BLS. A reclassification of about 550,000 such workers (out of 2,300,000) would reduce residential employment by 20% and raise nonresidential building employment by 20%, nearly matching the 21% gain in spending. Such a switch would also be consistent with readers reports that many subcontractors have turned from housing to commercial work.
If you are in the construction business, people will show up at your office or at the work site. They will ask if you are hiring. If you are they will fill out an application. There English may not be great, but they will manage to get it filled out.
If you hire them they will have all the needed documentation (often a legal drivers license, and a not so legal SS card) which you can photocopy and place in their employee folder. People in general construction rarely check references, but to the extent that they do, there is no reason why their references wouldn’t check out. When they fill out their W-2 form they will claim a dozen Dependants.
Congratulations, you now have now legally hired an illegal alien. The vast majority of people on a construction site will be hired through this method.
Once in a very blue moon the SS administration will contact you and tell you that some of your employees SS# does not match the name on file.