If the problem were on the supply side--that we had an excess supply of construction workers--then we would see excess demand for something else. But we don't. Scott Sumner does the Lord's work, and goes through the simple arithmetic:
TheMoneyIllusion: [M]acroeconomics should be all about specialization and trade. Except business cycle theory, which needs a special ad hoc sticky wage/price model. Why? Because the evidence simply doesn’t fit any other approach.... Yes, housing output was low in 2009 and unemployment was high. But is there a causal relationship? I say no. Housing starts peaked in January 2006, and then fell steadily for years:
January 2006 — housing starts = 2.303 million, unemployment = 4.7%
April 2008 — housing starts = 1.008 million, unemployment = 4.9%
October 2009 — housing starts = 527,000, unemployment = 10.1%
So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes. Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate.
Then NGDP plummeted, and housing fell another 480,000. Is this because people didn’t “want” those houses? No. They didn’t want 2.2 million new houses a year.... But they probably do want about a million new houses a year as our population grows by 3 million per year and families average about 3. The reason housing fell far below normal is because the severe fall in NGDP created a deep recession. Unemployed factory and service workers aren’t going to buy new houses.
Most importantly, the huge run-up in unemployment did not occur when the big fall in housing construction occurred, but much later, when output in manufacturing and services also plummeted...
Hold tight to this fact: housing construction has now been depressed longer and deeper than it was elevated during the housing boom. By this time next year we will not have any excess overhang of residential capital but rather a substantial deficiency.
Hold tight to this fact: "reallocation" occurs when people are pulled out of unemployment or jobs in which their marginal product is low by opportunities in expanding businesses. "Reallocation" does not occur when people lose their jobs and pile up as unemployed. "Reallocation" occurs not in depressions but in booms.