Housing Booms, Declining Manufacturing, and Rising Non-Employment

We study the extent to which the U.S. housing boom and subsequent housing bust during the 2000s masked (and then unmasked) the sharp, ongoing decline in the manufacturing sector. We exploit cross-city variation in manufacturing declines and housing booms and jointly estimate their effects on local employment and wages. Between 2000 and 2007, we find that a one standard deviation decrease in manufacturing labor demand reduces the share of non-college men employed by 0.9 percentage points, and a one standard deviation positive housing demand shock increases the employment share by roughly the same magnitude —enough to fully offset the adverse effects of declining manufacturing. We also find that housing booms significantly increase the likelihood that a displaced manufacturing worker finds employment, suggesting that at least some of our aggregate “masking” represents non-employment growth that would have occured earlier in the absence of the housing boom. Lastly, applying our estimates to the national labor market, we find that non-employment growth was reduced by roughly 30 percent between 2000 and 2007 due to the large, temporary increases in local housing prices, and we find that roughly 40 percent of the aggregate change in non-employment between 2000 and 2011 can be attributed to the decline in manufacturing. (JEL J21, E24, E32) 1E-mail: [email protected]; [email protected]; [email protected]. We thank seminar participants at the Einaudi Institute, the NBER Summer Institute (Macro Perspectives), and the Chicago Federal Reserve Board for helpful comments. We are grateful to David Toniatti and Dan Zangri for excellent research assistance. We gratefully acknowledge the Initiative on Global Markets at the University of Chicago Booth School of Business for financial support. Hurst thanks the Peter Wall Institute for Advanced Studies at the University of British Columbia and Notowidigo thanks the Einaudi Institute for both their financial support and hospitality while working on this project.