There is a mystery in the U.S. employment figures. Housing starts have fallen over 30% since their peak last year and all other measure of new housing supply (building permits, housing construction, housing completions) have also sharply fallen. But if we take the official employment figures employment in the construction sector - even considering the residential sector one alone - has barely budged downwards in the last six months. How can starts fall 30% plus and employment instead rise in housing construction?

There are two possible explanations:

1. Labor hoarding by home builders in expectation of housing recovery.

2. Mismeasurement of housing employment because of undocumented workers and cash contractors.

The first argument, presented by Jan Hatzius, the excellent U.S. economist for Goldman Sachs, is that home builders decided not to fire workers when housing starts started to fall last year because they were expecting a housing recovery this year. So they hoarded labor. Then the observed fall in housing construction productivity that we see in the data since 2006 is directly related to this labor hoarding. However, he argues that, if as likely, the recovery of housing does not occur this spring the home builders will have to start laying off such workers. So we will soon see the effects of this on the labor market.

The second argument, that I have presented before, is that undocumented construction workers (many "illegal" ones) were essential in many housing markets (up to 30% of employment in some of these markets) and these undocumented workers - that are the first ones to be laid off - are not recorded in the official employment statistics, not when they are hired and not when they are fired. The New York Times today has a front page article - titled Housing Slump Takes a Toll on Illegal Immigrants - presenting this case; and the Washington Post had a similar story two months ago. In addition to "undocumented" workers many construction contractors work for "cash" as a way to avoid tax-reporting. Thus, this category of real estate workers is also not well documented in official data. Thus, in this view, real estate employment has already fallen quite sharply (and actual - as opposed to recorded - productivity has not fallen much) but it is not yet recorded in the data. In this view - however - continued downturn in housing will lead home builders to start laying off even recorded workers  after the undocumented ones are mosty out. So we will start to see soon the fall in actual and measured housing employment in the months to come.

Which one of the two stories is the right one? Let us discuss this issue in more detail as well as analyze the recent evidence and data that the housing recession is getting worse, not bottoming out...