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Measuring Labor Market Slack in Construction
Homebuilders have long been citing a shortage of skilled workers as a bottleneck for ramping up production. This is a bit confusing because the construction unemployment rate is higher than the overall unemployment rate. While other industries are also clamoring about a shortage of skilled workers, they generally seem to be keeping up with the growing economy. Why does construction appear to be struggling more?
An early clue is that construction unemployment is highly seasonal. The rate is lowest during the summer when homebuilding is busiest, but it increases significantly in the winter as inclement weather slows progress on construction sites. While the unemployment rate across all industries experiences seasonal fluctuations, construction has far more dramatic swings.
Making Sense of the Data
To understand why construction is struggling more than other industries to keep up with a tight labor market, we can look at the historical relationship between construction unemployment and the overall unemployment rate. First, we should account for the seasonality that we observed above. For the graph below, I performed a seasonal adjustment on the unemployment rates to make comparing them easier.
If we calculate the spread, or difference, between the construction and overall unemployment rate, we can see that the construction rate usually sits between 2 and 4 percentage points higher than the overall rate—until the Great Recession.
Note the large gap that started to form during the recession and persisted for years after. That divergence is understandable given the housing bubble that preceded the recession. Residential construction was particularly hard hit after the bubble and many homebuilders went out of business; we would expect to see exceptionally high unemployment in that industry and for it to take longer to normalize.
How Does it Compare?
For the purposes of this analysis we’re looking to identify a stable relationship between construction and overall unemployment, so we want to exclude this disruption in identifying that relationship. In order to determine what is a ‘normal’ spread between construction and overall unemployment, we take the average spread prior to the Great Recession when homebuilding was destabilized.
The average spread prior to the housing bust is 2.65 points; when we look at recent data we see the spread has remained below this average since October 2014. This suggests that the construction labor market is indeed tighter than normal when compared to the overall labor market. Due to the higher, off-season construction unemployment rate, the seasonally-adjusted rate is persistently higher than the overall unemployment rate. With the difference between them below the historic average, we can conclude that the construction labor market is relatively tighter than the overall labor market. In fact, over the last year, the spread has averaged just 1.65%, a full point below the average spread.
What are the Options?
The textbook solution to competing in a tight labor market is to raise wages to attract more workers. However, with land and lumber prices already rising, homebuilders may be running out of pricing power. If builders are unable to raise home prices to cover pay raises, the difference will come out of their bottom line.
Another approach to fixing a shortage of skilled workers is to add training so that the desired skillset is more plentiful. The tradeoff of this approach is the same as above: it costs employers money. There are implications for our analysis, however, that suggests a different approach to the shortage.
While we adjusted away the seasonality of construction unemployment to identify a relationship to overall unemployment, seasonality is still an important part of construction unemployment. Looking back at the unadjusted data, we can see that construction unemployment bottoms out near the overall unemployment rate (prior to the housing bust) during the busiest time of year. Then the rate rises as work slows in the off season. Construction unemployment likely bottoms out near the overall rate because the construction labor market experiences the same hiring challenges as other industries. So, the construction labor market is about as tight as the overall labor market when business is busy, but there’s significant slack in the off season. Said another way: there’s a seasonal underutilization of the construction labor market.
This suggests a strategy to increase construction labor productivity. The current construction labor force could theoretically produce more homes if work could continue through the winter. This would likely require significant advances in technology such as mainstreaming offsite construction so that more work can be done indoors and therefore is not hampered by adverse weather. Like the other possible solutions, this one comes with a hefty price tag, but it also has significant opportunities for cost savings at scale.
Smoothing out the seasonality might bring with it a favorable side effect: attracting more workers. If the construction industry can offer better assurances that paychecks will come year-round, it might become easier to attract workers.
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