The Mystery of US Construction’s Declining Productivity

(gentle music)

We perhaps take for granted that the economy will continue to grow and become more productive over time. With technological advances and global trade, that has certainly been the case since the 1970s. However, this may not be the reality for all sectors of the economy.

Chicago Booth’s Chad Syverson and the Federal Reserve Bank of Chicago’s Austan D. Goolsbee find that the construction sector has experienced a large decline in productivity over the last half century, about a 1 percent drop on average each year. This contrasts with dramatic gains in sectors such as manufacturing, where productivity has expanded ninefold over the same period. Construction accounts for around 4.3 percent of GDP, so the sector’s lagging productivity amounts to a drag on the whole economy.

The researchers studied sector productivity using national and industry data from the US Bureau of Economic Analysis. They used a model that factors in the value of projects completed, the number of workers and their salaries, construction materials, and other capital costs. They find that the amount of building projects completed isn’t keeping up with the labor hours and resources needed to produce them. Interestingly, over that same period, capital investment in construction actually expanded nearly eightfold, indicating that there isn’t an issue of underinvestment in the sector.

What, then, could be causing this slump in construction productivity? The researchers were able to rule out that the way we measure productivity, rising labor costs, inflation, or other price markups were to blame. Several factors may contribute to the construction-sector lag. These could include regulation, local pushback to construction projects, or weak incentives to avoid slowdowns and stoppages.

The decline of the construction sector could be having far-reaching and negative consequences for the US economy as a whole, and it’s not just an American issue. The researchers show that 16 of the 29 countries for which the Organization for Economic Co-operation and Development reports construction data also had shrinking productivity over the past two decades. The researchers suggest that further study is needed to understand the underlying causes. Policy makers may have to find ways to address how this could affect matters such as the lack of affordable housing in the US.

(gentle music)