Construction is holding back American economy

The question of whether to prioritize jobs or economic efficiency is always difficult. Nowhere is this more of a dilemma than in the construction industry.
In a world of rapid technological disruption, construction is a rock of solidity to which many blue-collar workers can cling. The industry still employs about 7 million workers in the US.
The job doesn’t change that much from decade to decade. It’s a big broad occupation, unlike social-media marketing or other new niche jobs, so it allows working-class people to minimize the time and effort they spend building for a career. And workers get trained on the job, without years of college.
What’s more, construction workers are mostly male. To the degree this is a result of sexism, that’s bad. But it also means that the construction industry employs lots of men, at a time when they haven’t been doing so well in the jobs department.
Without jobs to provide dignity, working-class men may turn to crime, get addicted to heroin or fail to start families. With factory work disappearing, construction might be a much-needed lifeline holding together what’s left of blue-collar America.But there’s a big problem with the US construction industry — it costs way too much to build things.
Productivity in construction has stagnated throughout much of the world. But in the US it has done particularly poorly. In terms of value added per worker, construction-industry productivity has fallen by about a third since 1970.
If these numbers are accurate, it would be an epic disaster. If productivity declined that much throughout the economy, it would bring US
living standards down to those of Spain.
Fortunately, things may not be quite that bad. Measuring productivity growth in any industry is difficult. Costs have to be calculated correctly — for example, some calculations leave subcontractors out of the equation. And different pieces of the industry — for example, single-family home construction versus infrastructure construction — can behave very differently. The business cycle can distort the picture, too. In 2014, a team of economists from the Bureau of Labor Statistics found decreasing productivity in the industry, but the same team updated the analysis four years later and found an increase.
But everyone seems to agree that construction productivity hasn’t kept pace with other industries. This is having a big effect on living standards in the US. With road repair prohibitively expensive, whole towns can potentially wither and die as they get cut off from the rest of the economy. Expensive and inefficient trains make it harder for American cities to function, leaving poor people stranded at the edges of town. A shortage of new housing can drive up rents, especially in big cities, squeezing the poor and middle class and preventing cities from achieving their full productive potential. It can also reduce the quality of the housing stock, because buildings are too expensive to renovate. Housing is one of the most basic and important things that Americans consume — much more important than the latest iPhone or fancy new chat app.
Improving construction productivity would therefore make life better for all 323 million Americans and their descendants. The challenge, then, is to find out what’s holding the industry back. One thing that doesn’t seem to be the problem is excessive salaries for construction workers; pay in the industry is actually very modest.
There is, however, the question of overstaffing. Even if one construction worker is paid a low salary, hiring 10 workers to do a job that two could manage just as safely and easily would cause massive overruns. A recent investigative report in the New York Times found anecdotal evidence of enormous overstaffing in that city’s subway-construction projects, especially when compared with countries such as France. Infrastructure blogger Alon Levy says overstaffing is widespread, and pins the blame on union contracts, which are prevalent in government contracting.
Overstaffing means that the need to reduce construction costs directly conflicts with the need to provide more jobs to working-class Americans. That puts policy makers in quite a bind. Fortunately, before tackling the thorny issue of overstaffing, there are lots of other things that can be done to reduce construction costs. One important task is for governments to smooth out construction spending — instead of building only in boom times, cities and states should have a consistent flow of construction. That also reduces wear and tear on existing infrastructure, saving money down the road.
A second is to prevent regulatory interruption of construction work. In San Francisco, for example, repeated regulatory appeals routinely stop or delay construction work for long periods of time, creating risk, idling workers, and driving up costs. Streamlining permitting and approval processes and harmonizing building codes would also remove much of the regulatory burden without negatively affecting workers. A report by McKinsey & Co. also suggests moving to a long-term, collaborative type of contracting called Integrated Project Delivery.
In other words, there are lots of ways to reduce construction costs without addressing the difficult tradeoff between jobs and efficiency. In its quest to lower expenses, the US should first pick the low-hanging fruit of regulatory and contracting reform.

—Bloomberg

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion