Hurricane Will Test Strength of U.S. Labor Market

(Bloomberg Opinion) -- Hurricane Florence, bearing down on the coast of the southeastern U.S., is going to test an economy that’s already operating near full capacity. What will the impact be in the local economy and labor market after the storm, as damaged property and infrastructure need to be rebuilt? The unemployment rate in Wilmington, North Carolina, where Florence may do the most damage, is already at 3.6 percent, around its lowest levels in 20 years.

Lessons from Hurricane Harvey’s aftermath in Houston last year may apply — not only to Wilmington, but also to parts of the broader economy that are struggling to grow while labor is tight.

After Harvey devastated Houston, it’d be easy to think that while the damage was great, if anyone stood to benefit from rebuilding efforts, it would be construction contractors. But a construction labor market already operating at capacity shows how that might not be the case. Even if demand for something like general contractor services far exceeds supply — in theory a windfall profit opportunity for contractors — if supply chains are unreliable because of shortages, producers may be unable to cash in. That’s one of the takeaways from Harvey.

In Houston, contractors were overwhelmed by the demand and had to turn away work. Contractors who farm out tasks to subcontractors found those individuals and firms overwhelmed by work. Economists who believe that there’s some slack available in the labor market would be quick to point out that in response to the high demand, the number of construction workers in Houston did in fact surge.

The problem is when you’re talking about a field with specialized skills like construction, it may be easy to find bodies in the short term to do the job, but you don’t know what kind of quality you’re going to get. This is where life got miserable for contractors. New subcontracting firms made themselves available to do work, but contractors who went with some of those firms had problems with their work and then had to go back and fix the mistakes, with the cost overruns coming out of the contractors’ pocket.

Another problem in Houston was that so many construction resources were sucked away to do repairs that costs soared for homebuilders constructing new homes. Labor shortages have resulted in additional costs of $6,000 per new home compared to $4,000 before the storm. This has a direct impact on affordability for housing in the whole area.

Communities hit by Florence may face similar challenges. It’s not unique to hurricane season, however. These sorts of effects will be increasingly common across the U.S. economy because of labor tightness that we have rarely seen in decades.

Higher demand in the face of a constrained economy does in fact lead to higher prices and new labor supply one way or another. But in the short term, what you see is largely just growing pains: New workers and firms need time to gain experience and become productive, and at first their work may well be subpar and less profitable for those employing them. If those new resources came from elsewhere in the economy, then those sectors will find themselves with shortages of their own, resulting in higher prices and lost output.

In the long run, resources are reallocated to areas with greater demand. Hopefully those areas and the ones that have lost resources find a way to become more productive, allowing the economy to do more than it was able to before. But that transition is likely to be painful, resulting in higher inflation, possibly lower profitability, and production hiccups along the way.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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