The Future of Construction Employment

by Reihan Salam

Stephen Bronars laments the decline in construction employment:

The magnitude of the decline in construction employment during the 2008-2009 recession was unprecedented. The absence of a recovery in construction in employment during the subsequent recovery is also unprecedented. Had construction employment rebounded over the past few years as it had in previous recoveries, there would be 8.6 million workers in the construction sector instead of the current total of 5.8 million construction employees. The net difference represents a shortfall of 2.8 million jobs in the construction sector. Construction employment remains well below the levels of six years ago because businesses are investing less in structures than they did in previous recoveries and the residential housing market has not recovered as strongly as it has in other recoveries.

The shortfall of 2.8 million construction jobs is equivalent to the difference between the current unemployment rate of 7.4% and a 5.6% rate. Of course, if the economy were strong enough to generate an additional 2.8 million construction jobs there would also be more robust growth in income and employment in other sectors of the economy lowering the unemployment rate even further.

The sharp decline in employment in the construction sector since 2008 and the fact that only 8% of construction jobs have been regained during this economic recovery is extremely troubling. Construction differs from manufacturing because jobs can’t easily be outsourced to foreign countries. While manufacturing’s share of total employment has declined steadily for decades, construction’s share of total employment grew steadily for three decades from 1978 to 2008 until the sharp decline over the past five and one half years. [Emphasis added]

Bronars argues that the decline in construction employment reflects a failure on the part of the public sector to invest more heavily in upgrading infrastructure, and perhaps he is right. It is important to keep in mind, however, that U.S. infrastructure costs are much higher than in other affluent market democracies, as Stephen Smith, Alon LevyMatt Yglesias, and David Alpert have observed, among others. And as Barry LePatner argues in Broken Buildings, Busted Budgets, the absence of true fixed-price contracting has contributed to a culture of complacency in the U.S. construction industry, which is highly fragmented and dominated by relatively small-scale firms.

The construction sector will eventually recover — the U.S. population continues to grow, and existing structures will need to be replaced and upgraded over time, etc. But it is not obvious that construction employment levels will recover along with it. Though construction jobs can’t easily be outsourced to foreign countries at present, the rise of modular construction promises a future of robust productivity gains and rising quality as well as, as in the case of the manufacturing sector, declining employment levels. Or perhaps construction employment levels will increase and we’ll simply get much more bang-for-buck. But the factors that have shielded the construction sector from employment losses in the past are the same factors that have made U.S. infrastructure costs extremely high, and technological developments are likely to undermine them over time. This is good news for consumers of infrastructure, but less good news for less-skilled construction workers.

Michael W.L. Elsby, Bart Hobijn, and Aysegul Sahin have a new paper which considers the sources of the decline in the labor share of income in the U.S., and they cast doubt on several of the usual suspects:

Detailed examination of the magnitude, determinants and implications of this decline delivers five conclusions. First, around one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure. Second, movements in labor’s share are not a feature solely of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, institutional explanations based on the decline in unionization also receive weak support. Finally, we provide evidence that highlights the offshoring of the labor- intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years.

Even if the U.S. construction sector moves towards modular construction, construction work won’t necessarily be offshored, particularly if the cost of transporting building components proves prohibitive. The business model of construction firms might change, e.g., we might move towards greater standardization, which would greatly facilitate offshoring. But what we can safely say is that we will see more automation in the sector. 

So when we think about the future of construction employment, the findings of Frank Levy and Richard Murnane should be front of mind:

[H]uman work in the U.S. economy increasingly consists of three types of tasks: non-routine manual tasks, solving unstructured problems (car repair), and working with new information (determining a customer’s Internet problem). The growing importance of the second and third tasks represents a significant shift. For much of the 20th century a significant amount of work involved following directions. In many situations, directions were a shortcut—a way to accomplish a task without much knowledge of the underlying process. Today, work that consists of following clearly specified directions is increasingly being carried out by computers and workers in lower-wage countries. The remaining jobs that pay enough to support families require a deeper level of knowledge and the skills to apply it.

The construction work of the future will look quite different from the construction work of the present.