"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.Arguing against the reallocation story, Scott Sumner points out that most of the decline in housing occurred prior to the recession:
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:You can see this in a graph of real residential investment (red), which falls from nearly $800bn to $500bn (in 2005$, at annual rates) from the beginning of 2006 through the end of 2007. Most of the increase in the unemployment rate (green) occurs later, in 2008 and early 2009.
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...
That doesn't validate the reallocation hypothesis, but it is true that there were alot of construction workers among those losing their jobs in 2008 (but there were job losses throughout the economy, not just construction, of course, as an AD decline implies).