I've mentioned a few times that I generally prefer looking at construction progress through the lens of cost indexes rather than productivity indexes. Whereas productivity indexes try to track changes in the amount of construction we get for a given amount of labor (for labor productivity) or labor + capital (for TFP), cost indexes try to track changes in how much construction we get per dollar. Cost indexes don’t measure the absolute cost of construction (in, say, dollars per square foot), but relative changes from a particular reference year.
A single family house, and even more so, a hospital or warehouse, is not the same facility in 2023 as it was as recently as 1990 or 2000. The added complexity of these facilities, in terms of building controls, access egress controls, greater energy efficiency, more stringent environmental impact requirements, etc. both gives the facilities higher value to their. users, but also increases the required skill level of the workers building them and adds labor hours, as well as additional components like Cat-5 wiring, more complex AC units, etc. Some of the resulting cost increase is captured by increases in material and equipment input costs, but definitely not all of it. Prof. D. Quinn MIlls of MIT and Harvard wrote about this in the 1980s.
Could this be an example of Baumol Cost Disease in action? If another sector, such as automotive, was experiencing productivity improvements, then the value of one hour of work in the automotive sector is higher, and so automotive wages could rise. Many job-seekers who would have gone into construction can earn more in the automotive sector. So in order to attract new workers the wages in the construction sector would have to rise as well, even if there had not yet been enough compensating productivity improvement in the construction sector.
This is baffling. I think about the cost savings measures deployed in each of these trades. Those are not showing themselves anywhere.
For example, cordless nail guns and saws should result in much faster carpentry. And my experience with low-rise would lead me to conclude that this is the case. This should surely be reflected in the delivery costs. But it's not.
Is this a world wide phenomenon? The US is often compared to Nordic countries for instance. Has anywhere held the line? Does modular off-site construction help? Just curious if there's a model to look to for guidance. I've have my own thoughts about this but haven't actually seen data compared. For that matter can an apples to apples comparison be made?
The period 2000-2020 seems to be marked by above-CPI cost rises that are driven neither by labour costs nor by material costs. Could the driver instead have been a combination of land prices and permitting costs (particularly given rising Nimbyism)?
Thank you for creating such an informative and research-driven piece. I would be curious to learn how some of these trends compare to the value growth over time of publicly traded construction and real estate development firms. My take is that part of the reason we haven’t seen significant productivity or cost-efficiency gains is that many firms “do just fine” financially without such gains. DR Horton, Lennar, Pulte, Aecom, and others have done quite well over time in the public markets despite (or perhaps because of?) the trends that you have researched. I’m interested in why that is and what it means for the future of development and construction in the US.
A single family house, and even more so, a hospital or warehouse, is not the same facility in 2023 as it was as recently as 1990 or 2000. The added complexity of these facilities, in terms of building controls, access egress controls, greater energy efficiency, more stringent environmental impact requirements, etc. both gives the facilities higher value to their. users, but also increases the required skill level of the workers building them and adds labor hours, as well as additional components like Cat-5 wiring, more complex AC units, etc. Some of the resulting cost increase is captured by increases in material and equipment input costs, but definitely not all of it. Prof. D. Quinn MIlls of MIT and Harvard wrote about this in the 1980s.
Could this be an example of Baumol Cost Disease in action? If another sector, such as automotive, was experiencing productivity improvements, then the value of one hour of work in the automotive sector is higher, and so automotive wages could rise. Many job-seekers who would have gone into construction can earn more in the automotive sector. So in order to attract new workers the wages in the construction sector would have to rise as well, even if there had not yet been enough compensating productivity improvement in the construction sector.
This is baffling. I think about the cost savings measures deployed in each of these trades. Those are not showing themselves anywhere.
For example, cordless nail guns and saws should result in much faster carpentry. And my experience with low-rise would lead me to conclude that this is the case. This should surely be reflected in the delivery costs. But it's not.
Is this a world wide phenomenon? The US is often compared to Nordic countries for instance. Has anywhere held the line? Does modular off-site construction help? Just curious if there's a model to look to for guidance. I've have my own thoughts about this but haven't actually seen data compared. For that matter can an apples to apples comparison be made?
The period 2000-2020 seems to be marked by above-CPI cost rises that are driven neither by labour costs nor by material costs. Could the driver instead have been a combination of land prices and permitting costs (particularly given rising Nimbyism)?
Thank you for creating such an informative and research-driven piece. I would be curious to learn how some of these trends compare to the value growth over time of publicly traded construction and real estate development firms. My take is that part of the reason we haven’t seen significant productivity or cost-efficiency gains is that many firms “do just fine” financially without such gains. DR Horton, Lennar, Pulte, Aecom, and others have done quite well over time in the public markets despite (or perhaps because of?) the trends that you have researched. I’m interested in why that is and what it means for the future of development and construction in the US.
Construction costs increase faster than inflation
(except '08)
I will cite your work for clients!
Thank for the well researched article. Are you aware of any research done on peer countries of the US or regional cost indexes within the US?
Is this somewhat a story of union strength within the construction sector?