Is Mexico paying for U.S. housing downturn?

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - It's a mystery that has Wall Street debating such terms as birth, death and illegal immigration: Why haven't more U.S. construction jobs vanished in the wake of the housing market meltdown?

Much of the attention has focused on complex forecasting models and polls that the government uses to track employment, but some economists say undocumented workers are quietly bearing the brunt of the layoffs in the building sector.

This much is clear: residential construction has fallen some 25 percent since early 2006, but a government survey of employers shows a drop of less than 2 percent in jobs in the sector.

There is little consensus among the big investment banks as to what's behind the discrepancy, however. Depending on the answer, it could have major implications for the U.S. job market and interest rates, affecting everything from the price of milk to mortgage payments.

One argument holds that the government is notoriously poor at tracking jobs when the economy shifts rapidly, and that the Labor Department may have miscalculated how many construction firms may have been created and how many more went out of business -- a guesstimate known as the "birth/death" cycle.

That scenario would suggest that the job market is weaker than the numbers indicate, and wage inflation should not be a major concern for the interest rate-setting Federal Reserve.

Others speculate that the jobs simply shifted to commercial or government projects when residential construction slumped, or that companies have hoarded workers in hopes of a recovery.

But some data watchers think Latin America may be footing the bill. An estimated 2.2 million foreign-born Hispanics worked in the construction sector in 2006, according to the Pew Hispanic Center, representing 19.1 percent of industry employment.

"It appears that job losses among undocumented workers, principally from Mexico and other Latin American countries, have been serving as a buffer against job losses by resident or documented U.S. workers," Deutsche Bank economist Peter Hooper and his colleagues wrote in a recent report.

MONEY TO MEXICO

This may seem like a somewhat arcane debate, but investors have good reason to pay attention. The U.S. unemployment rate has hovered around 4.5 percent for months, suggesting a tight labor market and fueling fears of wage inflation.

Higher wages could mean rising costs for goods, making it hard for the inflation-wary Fed to lower interest rates.

But if the job market was weaker than it appeared, wage growth would be muted, and the U.S. central bank might be in a better position to cut rates -- which would make mortgages more affordable and ease pressure on the housing market.

Deutsche Bank's Hooper and others look at money sent to Mexico from the United States as a sort of proxy for the immigrant work force. More than half of immigrant construction workers come from Mexico, according to Census Bureau data.

The latest data shows that after years of dramatic growth that coincided with the U.S. housing boom from 2001 to 2005, money sent home by Mexicans living abroad fell 5.5 percent in May, the first decline since 1999.