JUST HOW SEVERE ARE THOSE CONSTRUCTION LABOR

SHORTAGES?
ANIRBAN BASU AND JOSEPH NATARELLI
ANIRBAN BASU is the chief construction economist at Marcum LLP and the CEO of the Sage Policy Group.
JOSEPH NATARELLI is the partner-in-charge of Marcum LLP's New Haven office as well as the National
Construction Industry Leader.

It is clear that the nation's construction industry would benefit from an accelerated influx of young,
talented, and ambitious workers.
Conventional wisdom holds that there are large skill shortages facing the U.S. construction industry now
and into the future. Underlying this wisdom is a set of facts and a group of anecdotes.
For instance, during its most recent downturn, the industry lost more than 2 million jobs, which chased
many workers into other industries. Although construction's recovery is ongoing, it began after recoveries
in many other economic segments, including in distribution, manufacturing, and energy generation. There
is a widespread belief that many of the workers dislocated from construction during the downturn are not
poised to return to the industry anytime soon with the possible exception of energy, which is now
shedding employment due to the recent collapse in commodity prices both domestically and globally.
Over time, construction has shown itself to be an intensely cyclical industry, and that is not appealing to
workers who highly value employment stability. Between July 2006 and July 2010, construction lost 2.2
million jobs. Five years later, only 40 percent of those positions had been recovered. By contrast, the
overall economy had recovered all of the jobs lost during the recession (in aggregate numbers) by the
spring of 2014. In short, other industries have been associated with less worker dislocation and faster
recovery, which could induce many to continue searching for opportunities beyond construction
segments.
The industry also faces a period of elevated retirement over the next decade and beyond. America's
skilled construction tradesmen are getting old quite old. An EMSI analysis reports that more than half
of tradesmen are older than 45, which is both a reflection of the passage of time and the lack of market
entry among younger workers. A separate report indicates that one-third of electricians are older than 55.
The number of plumbers and pipefitters is actually declining in certain markets due to accelerating
retirements.
Of course, the aging of the workforce is hardly unique to construction. As noted by the Pew Research
Center, as the year 2011 began, the oldest members of the baby boom generation began celebrating their
65th birthdays. [O]n that day, today, and for every day for the next 19 years, 10,000 baby boomers will
reach age 65. The fact of the matter is that every industry faces the significant impact of baby boomer
retirees.
What separates construction, arguably, is the fact that fewer young people seem eager to enter the
industry. Part of this is cultural. Today's young people and their parents have been told that bright futures
are associated with educational attainment. College completion has become a mantra for many families,
who have also been informed that America's future middle class will also revolve around the STEM fields
(science, technology, engineering, and math).

This advice is not necessarily false. Indeed, those who earn a college degree tend to earn notably more
than their high school graduate counterparts. In 2012, Americans aged 25 to 32 with a college degree
made an average of $17,500 more annually than their peers with a high school diploma as their highest
form of educational attainment. By contrast, in 1979, those college graduates earned less than $10,000
more, according to a Pew Research Center report.
The intense focus on college preparedness has led to high-stakes testing that typically emphasizes facility
in math and reading. These tests, however, do not necessarily emphasize applying knowledge to real-life
situations. Gone are shop classes and other coursework that once helped young people identify their
passions prior to graduation. These are the classes that often helped young people discover their interest
in construction.
While construction firm leaders understand that the industry is very much about applying science,
technology, engineering, and math to real-world problems and needs, the emerging workforce appears not
to associate the industry with the economic cutting edge. When young knowledge workers conceive of
their own futures, they are likely to entertain thoughts of Silicon Valley, Austin, Boston's suburbs, Seattle,
San Diego, the Research Triangle, suburban Washington, D.C., and a host of other technology-abundant
communities. They are less likely to turn their minds toward construction, which takes place everywhere.
Therein lies a major problem.
Few classify construction as a technology sector the way that they routinely do life sciences,
nanotechnology, or computer sciences. This may help explain why many of America's best and brightest
students do not frequently consider construction when contemplating their respective career paths.
All of these factors are conspiring to create skills shortages in construction, and there are plenty of data
figures to support the notion that shortages already exist. Between July of 2014 and July of 2015, the
national construction workers' unemployment rate declined from 7.5 to 5.5 percent. 5 Moreover,
according to the latest survey (2014) from the Associated General Contractors of America, 83 percent of
construction firms are having difficulty finding qualified workers particularly in the craft trades. 6 The
Bureau of Labor Statistics indicates that the number of unemployed workers who reported last working in
construction recently declined to 474,000 in July of this year the lowest tally since 2006.
The Construction Financial Management Association (CFMA) surveys CFOs in the construction industry
each quarter. The Confindex survey has emerged as one of the construction industry's leading barometers
of current and prospective business conditions, including with respect to sales, profitability, labor
availability, and input costs. During the second quarter of 2015, the biggest source of concern among
CFOs was skills shortages. A total of 74 percent of respondents were either very or highly concerned by
emerging construction skills shortages, up from 71 percent during the year's first quarter. As shortages
tend to boost labor costs and negatively impact profit margins, it is unsurprising that only 1 percent of
respondents reported anticipating profit margins to be significantly better one year from now.
The National Association of Home Builders (NAHB) surveyed single-family builders in June of 2015 and
found that shortages of labor and subcontractors already significant and widespread in mid-2014
have intensified during the past year. The shortages are most acute for basic skills like carpentry, which
are needed during the construction of any home. For example, in the 2015 survey, 69 percent of builders
reported a shortage (either serious or some) of construction workers willing and able to do rough
carpentry. 9 The evidence of growing skills shortages shows up in other ways. For instance, craft
workers are now associated with record workweeks, and construction job growth has been soft in recent
months despite rising construction spending.

There are many impacts associated with skills shortages, most of them negative. First and most obviously,
the lack of workers drives up unit labor costs and drives down profits. That in turn translates into fewer
resources available to invest in technology, which means that workers are being paid more without
necessarily becoming more productive over time. This is occurring because wages are rising for reasons
of scarcity, not because of expanding marginal output. With the pace of retirements accelerating and too
few young people entering the industry, profit margins stand to be placed under greater pressure over
time.
According to an article published by the National Society of Professional Engineers, Paul Teicholz and
Matt Stevens (professors at Stanford University and the University of Melbourne, respectively) have
shown that productivity in the U.S. construction market has changed little over the past three decades. If
you look at curves of labor productivity, the manufacturing industry has been taking off for quite a long
time at a rate of five to six percent a year, Teicholz says. If you look at the growth data for the whole
[construction] industry, if anything, labor productivity is getting worse.
Other researchers have also determined that output per construction worker has been in decline for
decades. Part of this may be attributed to the influx of lower-skilled workers from other nations over that
time period. Their abundance may have induced some construction firms to adopt more labor-intensive
(as opposed to capital intensive) production methods, meaning less equipment and technology is utilized
on a per-worker basis. The result is both lower average wages and reduced productivity.
Moreover, having spent more money on workers in scarce supply more recently, firms may have the
temptation to use less experienced and qualified workers in certain occupational categories, translating
into more accidents, lower quality, and a higher risk of having to redo completed work. None of this is
good for long-term profitability or the broader economy.
The good news is that there are existing pipelines though which younger workers can enter construction.
According to federal apprenticeship data published by the Department of Labor, of the top 25
apprenticeship program categories in fiscal year 2014, approximately 75 percent relate to construction
activities. At the top of the list are electricians, with nearly 33,400 active apprentices in fiscal year 2014.
Next are carpenters at roughly 10,700 active apprentices and plumbers with slightly more than 10,000.
Other leading occupational categories in terms of apprenticeship programs are craft laborers, pipe fitters,
roofers, millwrights, drywall applicators, and painters. It's a start, but nowhere near what it will take to fill
the jobs of the future.
Not everyone is convinced
Despite this and other evidence, there are those who believe that the presence of construction skills
shortages is exaggerated. Elise Gould at the Economic Policy Institute points out that there are plenty of
unemployed construction workers per construction job opening. Moreover, contractors can secure
workers from sources beyond those who are currently unemployed, including appealing to employed
workers in other industries.
Perhaps the most compelling evidence of hyperbole comes from wage data. In analyzing claims of
residential building labor shortages made by the NAHB, Ross Eisenbrey and Heidi Shierholz of the
Economic Policy Institute write, The best way to identify a tight labor market, let alone a market beset
by actual labor shortages, is to examine wages. Basically, if wages aren't rising, the labor market isn't
tightening; if they don't rise strongly, there are no shortages.

Kevin Cashman of the Center for Economic and Policy Research (CEPR) writes, If there were a labor
shortage in the construction industry, we would also expect there to be healthy wage growth. Employers
would be competing over a smaller pool of workers, and higher wages would attract construction workers
to the firms offering them (or entice workers in different industries or occupations to switch to
construction). Cashman remarks that that kind of significant wage growth has not been observed, with
year-over-year wage growth in production and supervisory construction positions not being particularly
high. He writes, The year-over-year wage growth for the top ten construction occupations shows us that
wage growth has generally declined since 2008, and growth in all ten occupations was under 2.0 percent
in 2014.
Cashman argues that to bolster claims of a shortage, the [construction] industry puts out reports based on
non-scientific surveys of employers. According to his analysis, if contractors are having difficulty filling
job openings, it is simply because they are offering too little in the form of compensation, probably
because they are fixated on keeping their labor costs low.
The upshot
Whether or not reports of construction skills shortages are exaggerated, it is clear that the nation's
construction industry would benefit from an accelerated influx of young, talented, and ambitious workers.
Construction industry productivity continues to sag. The industry's technological progress has fallen well
short of many others, including communications, retail/distribution, and manufacturing.
Viewed broadly, one could consider construction to be in the midst of a sub-optimal equilibrium. Low
worker productivity translates into low profitability, which in turn leads to diminished investment in
technology and training. This, in turn, reinforces the cycle of low productivity and profitability. Some
firms will break out of this equilibrium. Some already have, operating as much as technology companies
as construction firms. These firms stand to gain market share and also to lead a revolution in the way
construction services are delivered.