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Reconstructing the Great Recession

This paper evaluates the role of the construction sector in accounting for the performance of the U.S. economy in the last decade. During the Great Recession (2008-09), employment in the construction sector experienced an unprecedented decline that followed the largest expansion in total employment since the 1950s. Despite the small size of the construction sector, its interlinkages with other sectors in the economy propagate the effect from changes in the demand of residential investment, hence amplifying the effect on the overall economy. An input-output analysis reveals that the construction sector has been an important driver of the dynamics of aggregate employment and output of the U.S. economy through the sectorial interlinkages. The importance of interlinkages is illustrated in a static model and then quantified in a generalized framework that includes fixed and residential investment. The model is calibrated to reproduce the boom-bust dynamics of construction employment in the period 2000-10. We find that construction and its interlinkages account for a large share of the actual changes in aggregate employment and gross domestic product during the expansion and the recession. Through the lens of the standard business cycle accounting, the recession generated in the model, as in the data, is due to the worsening of the labor wedge.

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