Long-term unemployment and housing booms...

I want to come back to unemployment. I think that the worst form of unemployment is long-term unemployment, since people that are jobless for a long time feel excluded from society and may face a multitude of psychological problems that might evolve into social problems. Moreover, I believe that in some extreme cases the long-term unemployed feel a certain frustration and desperation that could be expressed through anti-social behavior (criminality, aggression, inter-family violence etc.).

source: World Bank

The graph shows long-term unemployment for four European countries. I selected these countries because during the 00s they experienced a housing boom. 

As a background note I have to say that structural unemployment is the form of unemployment caused when a mismatch between workers skills and those demanded in order to get employed, occurs. I believe that long-term unemployment is in a large part structural, since even when it does not start like that when a worker is unemployed for long his skills become obsolete. But I think that the true extent of structural unemployment can empirically be assessed at the height of an expansionary phase of the business cycle and is roughly equal to the long-term unemployment at the time.

The construction industry offers working positions that do not demand heavy specialist skills, hence a lot of untrained workers seek employment there. Maybe low level services jobs demand an analogous skill-set. So I tried to get data for countries that had a housing boom, to see how it affected long-term unemployment.

source: World Bank, Nationwide Building Society

 I think that the above chart about the UK makes it obvious that when house prices record sustained upticks, long-term unemployment declines. Hence, for the UK, structural unemployment is about 20% of the total unemployment (provided that my assumption is correct).

The same pattern is valid for Ireland and Spain too. The only country that was an exception to the aforementioned norm is Greece.  Despite the housing boom, long-term unemployment in Greece did not decline. There are a number of possible reasons for this. Since I cannot substantiate any explanation I can think of with hard data I will not get into discussing them. Following the same line of thinking with above, structural unemployment in Greece is pretty high and stands at approximately 50% of total unemployment.

source: ECB

But where do all the long-term unemployed workers come from? Well, some western countries display a rather strong de-industrialization trend due to lower labour costs in Eastern Europe and Asia among other reasons. Here Greece is no exception, since it posted a hefty decline in total industry employment as a % of total employment. The other country that showed a strong deindustrialization trend was the UK, while the number for Spain was essentially flat and Ireland actually posted an increase in industrial employment.

Of course, the housing sector cannot get credit for all newly-created jobs. All the countries mentioned above displayed strong services sector growth during the same time, meaning that the said sector share in total employment did rise as a % of total. In my book that means that the sector is growing and is creating new jobs, so maybe a part of the fall in long-term unemployment can be attributed to the services sector.

source: World Bank

source: World Bank

One can say that there is no way that the housing sector created more jobs than the services sector. That might well be so, but first think of the following: first of all, the housing sector has the advantage that it enlivens a large number of sectors and second, I believe that the skills required to get employed in the housing sector more closely match those of an unemployed ex-industrial worker than those of the services sector do. By that I do not mean that no long-term unemployed sought and found employment in the services sector, they surely did. But I think that most long-term unemployed with an industrial background took jobs in construction. Since, these past years, most European countries and the USA showed definite de-industrialization signs, I think that in the most part, long-term unemployment declines can be attributed to the boom in construction. Now that the housing sector in Spain, Ireland and Greece (even if this is not reflected on prices in the Greek case) is in free fall, a hefty rise in long-term unemployment might be in the cards…

P.S. Of course, if austerity measures persist, private final consumption will decline dramatically and we will have more than one sources of possible long-term unemployment so structural unemployment is bound to rise.

P.S.2: I did not select the time-series for male employment in services and industry with any intention of prejudice it’s just that female employment in the housing sector tends (at least for the time being) to be rather low...