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Since 1970, the US population has grown by more than 100 million and, from an economic standpoint, productivity expanded alongside it. But despite advances in the way we live and work, research suggests one sector of the economy isn’t keeping up: construction.
For the past half century, the United States has experienced a large decline in construction sector productivity. The amount of building projects completed (output) isn’t keeping up with the labor hours and resources needed to produce them (input). Worse still, this “unusually awful” decline in such a big industry has slowed productivity growth for the whole economy, according to Chicago Booth’s Austan D. Goolsbee and Chad Syverson. Goolsbee is currently president of the Federal Reserve Bank of Chicago.
A construction worker in 2020 actually produced less than a construction worker in 1970, they calculate, reinforcing an observation made by the Economist, among others. This decline has larger economic effects, given that the sector on average accounted for 4.3 percent of GDP between 1950 and 2020, the researchers note, adding that it isn’t due to underinvestment; over the same period, capital investment rates in the industry were as high as they were for the overall economy.
Goolsbee and Syverson estimated productivity using national and industry data from the US Bureau of Economic Analysis, with a model that factors in the value of projects completed, the number of workers and their salaries, construction materials, and other capital costs.
Before about 1970, the US construction sector was more productive than the overall economy. But since then, research finds, the sector’s productivity has been trending downward, even as overall productivity has been improving.
They dispel the idea that the way we measure productivity—how much more can be produced with the same number of workers and amount of equipment and land—is solely to blame for the trend. Even rising costs related to labor, capital, inflation, or other price markups can’t explain the slowdown, they argue. They suggest that further research is required to pin down what factors are driving the productivity decline. Syverson speculates that any combination of number of frictions may be at work, including but not limited to regulation, pushback from residents and officials, and weak incentives within the sector to avoid slowdowns and stoppages.
Throughout the 1950s and into the ’60s, US construction productivity grew steadily alongside that of the economy as a whole and even outpaced other industries such as manufacturing. But by 1970, traditional measures of labor and efficiency—such as total factor productivity, a combination of labor plus capital—began to decline, the study finds. By 2020, while aggregate labor productivity was 290 percent higher than in 1950 and aggregate TFP gained 230 percent, both measures for construction productivity fell below the 1950 levels. In fact, labor productivity declined at an average rate of 1 percent per year between 1970 and 2020, Goolsbee and Syverson find. Over the same period, capital investment in construction expanded nearly eightfold, with no noticeable slowdown after 1970, according to the study.
“This is stunningly bad productivity performance for a major sector,” the researchers write, especially compared with the ninefold increase over the same period for labor productivity in manufacturing, a sector that also deals with assembling products.
Using state-level output and employment data from the US Census Bureau Survey of Construction, the researchers also calculated the value of what was produced per construction employee in each state between 1972 and 2017 and then compared that with a state’s share of US net construction value. States with higher initial productivity in construction—such as Alaska, Michigan, and California—should have subsequently recorded more growth in construction activity than initially low-construction-productivity states such as New Mexico, Virginia, and Arkansas. That didn’t happen. “If anything, resources seem to move away from the more productive states,” the researchers write.
Whatever the cause, this presents a challenge for US policy makers as they ponder how to address the lack of affordable housing. But the US isn’t the only country with a construction productivity problem, Goolsbee and Syverson find. In the 29 countries for which the international Organisation for Economic Co-operation and Development reports construction sector value added per employee, 16 had negative average labor productivity growth in construction between 1996 and 2019.
“The productivity struggle is not just a figment of the data,” the researchers write. “It is real. . . . Certainly construction is an important enough component of total economic activity to warrant attention."
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