Stage Set for Employment Cost Increase in Construction Industry

As the U.S. construction industry continues its recovery, the much-discussed labor shortage will continue to change its scope. With that change will also come an increase in pay for workers, according to Associated General Contractors of America (AGC) chief economist Ken Simonson.

Simonson recently joined CMD chief economist Alex Carrick and American Institute of Architects chief economist Kermit Baker to discuss that topic, among others, in a webinar titled, “Is the Pace of Construction Investment Set to Quicken?”

Simonson notes that construction unemployment fell sharply over the past four years, but employment in the industry rose at a lesser rate. While the stretch of October 2010-October 2014 saw a 903,000-person decrease in construction unemployment, by October of this year, the industry had only hired back fewer than 600,000 in that span.

“More than 300,000 have either retired, gone back to school, gone to other industries or left the workforce,” he says. “They’re not sitting at home waiting for contractors to call them back. And that’s why so many contractors are having a hard time finding construction workers now.”

According to a recent AGC survey, 83 percent of firms with craft employees report they’re having trouble filling one or more craft positions. As a result, Simonson expects a “sharp upturn” in employment costs, which will result in workers entering or re-entering the industry.

“There is growing evidence that contractors are starting to raise either base pay, signing bonuses, completion bonuses with a job or per diems for traveling,” he says.

The Bureau of Labor Statistics’ (BLS) Employment Cost Index rose 2 percent in 2013, and Simonson projects it will increase 1.5-2.5 percent in 2014 and another 2.5-5 percent per year from 2015 through 2017.

Meanwhile, according to the U.S. Census Bureau and the BLS, construction spending has increased 19 percent over the last four years, while jobs have increased at nearly half the rate at 10 percent.

Simonson says the spending increase is a result of contractors charging more, as indicated in a Producer Price Index increase of 11 percent in nonresidential building, as well as a higher rate in hours per worker. According to the BLS, aggregate hours in that four-year span have increased 13 percent, a 2-percent increase per employee. He notes, “Further spending growth will trigger larger hiring—but will workers be available?”

In terms of total employment in the U.S., Carrick says May was a “turning point,” as the employment finally rose back above where it was pre-recession.

But while Carrick notes that employment in architectural and engineering services is “almost back to where it was at its last peak,” the construction employment level is far from its peak pre-recession due to many people leaving the industry.

Specifically, U.S. construction employment as of September of this year is 21 percent lower (minus 1.6 million) than its April 2006 peak. Simonson notes that North Dakota and Louisiana were the only two states to hit their peak in 2014.

Aside from a few rare one- or two-week spikes, initial jobless claims in the U.S. on a week-to-week basis have continued to decline since its peak of just under 700,000 in the early part of 2009. Over that same period of time, U.S. construction unemployment has decreased overall on an up-and-down step pattern.

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