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A few days ago I tweeted, “Last 16 months construction jobs growth outpaced growth in work put-in-place. Hard to see worker shortage from that perspective.”
The imbalance between construction spending and construction jobs is nothing new. It’s been going on for years. It reflects more than just worker shortages. In part it reflects hiring practices. It also captures changes in productivity due to activity. It also helps explain why sometimes new jobs growth rates do not follow directly in step with spending growth. That imbalance can be affected by either over/under-staffing or inflation.
This post presents a series of graphics that show the data that is compared and the percentages of increases (or declines) in balance between workers and output.
What data is available?
We get construction spending from Census and jobs from Bureau of Labor Statistics. For both we can break down the numbers by major construction sectors, Residential, Nonresidential Buildings and Non-building Infrastructure. Inflation is gathered from a number of sources and is specific to sector.
How to look at the data.
Construction spending must be adjusted for inflation to get real volume of work completed. Inflation (or deflation) can vary up or down by 2% to 10% but averages about 4%/year. The adjustment gives us what is referred to as “constant dollars.” Jobs must be adjusted for hours worked. Hours worked can change total workforce output by 2%-3%/year. Everything is converted to the most recent year for comparison.
This Building Cost Index plot shows inflation/deflation by sector. Note that it can vary dramatically from one sector to another. It is often driven by the amount of work activity within the sector. These indexes represent the actual final cost of buildings.
The inflation factors are applied to the annual spending within each sector. This plot shows the combined affect of inflation on total construction output. Current dollars is actual construction spending as reported by U.S. Census. Constant $ is inflation adjusted to 2016. Jobs adjusted for hours worked must be compared to constant dollars.
This plot breaks down the construction spending in constant dollars by sector. This provides the total work completed annually within each sector. This will allow tracking jobs by sector to constant $ by sector.
This plot shows U.S.Census CES jobs by sector. These are adjusted by the hours worked average per year. Hours worked doesn’t change by much within a single year but has varied by 4.5% from maximum to minimum and that has a significant affect on overall output. Adjusted jobs provides us with the total work output.
Those are all the inputs, adjusted to a constant point in time, 2016. Now we can look at how adjusted jobs growth compares to real spending output. I’ve often referred to this as productivity. When spending output is growing faster than jobs, productivity is increasing. When jobs are growing faster than spending output, productivity is decreasing.
The difference between real spending output and jobs growth is more than simply explained as a change in productivity. It reflects the combined impact of hiring practices, hours worked, worker and skills shortages (or excesses) and changes in productivity on inflation adjusted spending. It does not provide a means to differentiate among these causes. However, regardless the cause, imbalances can be thought of as annual productivity gains or losses because they do indeed reflect the total real labor output required to perform the amount of real work put in place.
Leading up to and during the recession there appeared to be far more workers on hand than needed to get the work done. Prior to the recession, I expect a greater portion of the losses were over-hiring and worker productivity losses. It is not uncommon when work is plentiful that productivity declines (2005-2006). When spending started to decrease significantly it took a bit longer for companies to downsize their workforce. During that time (2007-2008) the greater portion of losses might be attributed to insufficient staffing reductions. As we approached the depths of the recession (2009-2010) staffing cuts exceeded the declines in actual work being put in place. Also, people who still had jobs were concerned about keeping their jobs and during such times at first productivity increases. At some point the insufficient staff becomes overworked and productivity declines (2010-2011). Post recession, spending increased faster than companies were replenishing their staff. That led to several years of productivity gains (2012-2015).
Another way to look at this same comparison is to plot the dollars of inflation adjusted volume of work per worker. Here I’ve plotted that by sector.
Some analysts prefer to report this as the number of jobs required to put-in-place $1 billion worth of work. Regardless how it is reported, it is imperative that the comparison be made to constant $, in this case adjusted here to 2016.
Finally we can look at the data for each sector and compare the work being completed each year to the total workforce output to complete that work. There are obviously significant differences in the data by sector.
The data outputs show some things that otherwise are not readily apparent. Note for instance that residential (constant $) spending peaked in 2005, but residential jobs peaked in 2006 when spending was already on the decline. That could be an indication that staffing patterns lag changes in work volume. From the 2005 peak to the 2008 bottom, residential spending declined from $700 billion to $300 billion, almost 60%, but jobs dropped from 3.5 million to 2 million, only about 45%. That would indicate that firms were significantly overstaffed at that time. That explains the several years of deep red bars on the residential productivity plot. That also helps explain in part the slow regrowth on residential jobs. For the real volume of work that was being completed at the time, which was real low, there was already excess staffing remaining on hand.
Work completed and worker output to complete the work will probably continue to be out of balance. It would be difficult to identify any abnormalities in the data releases, for example workers improperly classified to a sector. Any missing workers not captured in the survey would lower productivity. Real productivity gains and losses due to activity will always be a part of the mix. Hiring of less qualified workers due to skilled worker shortages is in the mix. And finally, companies delayed decisions on staffing adjustments will remain part of the issue.
Why the big slow down in construction jobs this Year? Is work volume on the decline? Are labor shortages to blame?
These days, the most talked about reason for slower jobs growth is the lack of experienced workers available to hire. In fact, recent surveys indicate about 70% of construction firms report difficulty finding experienced workers to fill vacant positions and the Job Openings survey has been at highs for several months. That certainly cannot be overlooked as one reason for slower jobs growth, but that is not the only reason?
Although recent growth has slowed, even with all this talk of difficulty finding experienced construction workers, there has been very good jobs growth. For the 5 ½ year period from the low point in January 2011 to the present (August 2016) we added 1,240,000 construction jobs.
- Jobs increased by 23% in 5 ½ years.
- Spending growth increased 52% in that same 5 1/2 years.
Why is it that jobs don’t increase at the same rate as construction spending? Because much of that spending growth is inflation, not true volume growth. Volume is construction spending minus inflation. To get volume, convert all dollars from current $ in the year spent into constant $ by factoring out inflation.
- Spending growth is not a true measure of increase in real volume.
- Jobs growth should not be compared to spending growth.
Now that we have spending converted to volume, we need to adjust jobs to get real work output. The total hours worked affects the entire workforce so has a significant impact on output.
- Jobs is not a true measure of work output.
- Jobs x hours worked gives total work output.
Spending must be factored to remove inflation and jobs should be factored to include any change in hours worked.
- In the 5 1/2 years from Jan 2011 to mid 2016, real construction volume and jobs/hours real output both increased by 28%.
Now we see over the long term, job/hours and real volume are moving in tandem. But there are always short term periods when they do not and that causes ups and downs in productivity.
In 2014-2015, jobs/hours grew by 11%, the fastest growth for a two-year span in 10 years. Real volume of work increased by 16% producing a real net increase in productivity. But productivity had declined significantly in 2010 and 2011. It’s not unusual to see productivity balancing out over time. In part, this is due to companies balancing their total employees with their total workload.
From October 2015 through March 2016, jobs growth was exceptional. 214,000 construction jobs were added in 6 months, topping off the fastest 2 years of jobs growth in 10 years. That is the highest 6-month average growth rate in 10 years. That certainly doesn’t make it seem like there is a labor shortage. However, the jobs opening rate (JOLTS) is the highest it’s been in many years and that is a signal of difficulty in filling open positions.
- For the 6-month period including Oct’15 thru Mar’16 construction gained 214,000 jobs, the fastest rate of consecutive months jobs growth in 10 years. Then, after 3 months of job losses, July, September and October show modest gains.
I would expect growth such as we’ve had for two years and then that 6 month period to be followed by a slowdown in hiring as firms try to reach a jobs/workload balance. It appears we may have experienced that slowdown. Jobs declined for four of five months from April through August. Keep in mind, this immediately follows the fastest rate of jobs growth in 10 years. But it also tracks directly to three monthly declines in spending. (I predicted this jobs slowdown in my data 9 months ago. I predicted the 1st half 2016 spending decline more than a year ago).
It is not so unusual to see jobs growth slowed for several months. It follows directly with the Q2 trend in spending and it follows what might be considered a saturation period in jobs growth. The last two years of jobs growth was the best two-year period in 10 years. It might also be indicating that after a robust 6 month hiring period there are far fewer skilled workers still available for hire. The unemployed available for hire is the lowest in 16 years.
If spending plays out as expected into year end 2016, then construction jobs may begin to grow faster in late 2016. However, availability could have a significant impact on this needed growth.
Availability already seems to be having an effect on wages. Construction wages are up 2.6% year/year, but are up 1.2% in the last quarter, so the rate of wage growth has recently accelerated. The most recent JOLTS report shows we’ve been near and now above 200,000 job openings for months. With this latest jobs report, that could indicate labor cost will continue to rise rapidly.
As wages accelerate, also important is work scheduling capacity which is affected by the number of workers on hand to get the job done. Inability to secure sufficient workforce could impact project duration and cost and adds to risk, all inflationary. That could potentially impose a limit on spending growth. It will definitely have an upward effect on construction inflation this year. If work volume accelerates, expect labor cost inflation to rise rapidly.
The most talked about reason for slower jobs growth is the lack of experienced workers available to hire. In fact, recent surveys indicate about 80% of construction firms report difficulty finding experienced workers to fill vacant positions. That certainly cannot be overlooked as one reason for slower jobs growth, but is that the only reason?
Even with all this talk of difficulty finding experienced construction workers, there is a lot of hiring going on. For the 5 year period 2011-2015 we added 1,100,000 construction jobs with the peak growth rate in 2014 at 6.1%. Jobs increased by 20% in 5 years.
For the two years 2014 + 2015 we added 650,000 jobs, the largest number of jobs in two years since 2004 + 2005. In that two years, jobs expanded by 11%, the fastest percent growth since 1998-1999, the fastest pace in 17 years. But peak growth was in 2014 with slower growth in 2015. I expect even slower growth in 2016.
Construction spending hit bottom at the same time as jobs, the 1st quarter 2011. For the same 5 year period 2011-2015 construction spending increased far more than jobs growth. Why is it that jobs don’t increase at the same rate a construction spending? Because much of that spending growth is just inflation. When describing a shortfall of construction workers, jobs growth should not be compared to spending growth. After adjusting for inflation from Q1 2011 to Q4 2015, we find that construction volume increased by 22% in 5 years.
Now it looks like over 5 years jobs seem to be growing nearly the same as construction volume. It even looks like productivity increased, but that’s still not the whole picture.
Real work output growth is total jobs adjusted by the hours worked each year. From 2011 to 2015 construction hours worked increased by 3.6% from near the lowest on record to the highest ever recorded. The reason this has such a huge effect is hours worked gets applied on all 6.5 million jobs, not just the new jobs added. So, a workforce that grew by 20% worked 3.6% longer hours showing that net total work output actually increased 24.3%.
This data shows that over the last 5 years new volume increased by 22% while work output to produce that volume increased by 24%. Data clearly indicates we have added more work output than the volume of work we have produced. This indicates a drop in productivity over the last 5 years.
It is not uncommon at all that productivity declines during rapid growth. This pattern of growth appears prominently in the last two expansions between 1996 and 2006. Firms may be increasing staff based on revenue without strict attention to real volume growth, only to then slow jobs growth and allow volume production to catch up.
By measuring to previous productivity levels, we could say the construction workforce is currently overstaffed. Of course, spending (and net volume after inflation) is expanding rapidly and with it so must the workforce. But, if there is any hope that eventually productivity will return to previous levels, then we must hope for a minimum increase of 2%+ in volume with no matching additional increase in new jobs or hours worked.
Over the next two years I predict construction spending will increase close to 20%, BUT construction volume will increase only 10%, most of that in 2017. In a previous post, “How Many Construction Jobs Will Be Needed” I predicted jobs will grow by 500,000 to 600,000, only about 8%.
Filling positions with workers less qualified than those who were lost accounts for some of the decline in productivity. Working longer hours also leads to productivity loss. To regain lost productivity, new workers need to gain experience AND overall hours need to be reduced and that workload replaced with new jobs. That’s certainly not likely to happen all in one year, but it may account for some of the reason why volume is currently growing faster than jobs, and that’s a good thing. I expect that will continue at least for the next two years.
It is sometimes necessary when the situation dictates to increase working hours to achieve a shortened schedule. However, numerous studies can be found to support that Overtime results in lost productivity. There are other factors that affect productivity, but just to address the topic of Overtime, for the moment they will be ignored. This productivity loss set of data is from Applied Cost Engineering, Clark and Lorenzoni, Marcel Dekker, Inc., 1985.
As both hours and number of days worked increases over 5 days and 8 hours, productivity declines. 5 days and 8 hours is considered the norm = 0% productivity loss. Any increase in hours or days above this norm reduces productivity. All values approximate and % loss is loss of production on ALL hours worked.
5 days and 8 hours = 40 hrs @ 0% productivity loss = 40 hrs productive
5 days and 10 hours = 50 hrs @ 7% productivity loss = 46.5 hrs productive
5 days and 12 hours = =60 hrs @ 12% productivity loss = 53 hrs productive
6 days and 8 hours = 48 hrs @ 3% productivity loss = 46.5 hrs productive
6 days and 10 hours = 60 hrs @ 17% productivity loss = 50 hrs productive
6 days and 12 hours = 72 hrs @ 25% productivity loss = 54 hrs productive
7 days and 8 hours = 56 hrs @ 7% productivity loss = 52 hrs productive
7 days and 10 hours = 70 hrs @ 20% productivity loss = 56 hrs productive
7 days and 12 hours = 84 hrs @ 28% productivity loss = 60.5 hrs productive
Not only does overtime produce lost hours, but the cost of the overtime hours increases. Hours over 8 might cost 1.5x normal rate. Days over 5 might cost 2x normal rate. Increasing days and hours rapidly balloons the cost of completing the work. However, if absolutely necessary to meet unusual schedule demands, the cost vs time to complete work can be modeled for each scenario and the least destructive option (whether that be cost constrained or time constrained) can be agreed upon by all parties. The best choice is always that which requires the minimum added cost to achieve the restricted schedule.
See this blog post for an example Construction Overtime – A Common Miscalculation