Productivity in the construction industry has languished in the US and many other advanced economies. It has either stagnated or declined in these countries even as productivity in the wider economy has grown at a solid pace.
“The persistent decline in construction productivity appears to be a common trend across advanced economies but it has been most acute in the US, contributing to its housing shortage and affordability crisis,” writes Elsie Peng, an economist in Goldman Sachs Research, in a recent report.
Since 1965, labor productivity in US construction has been falling at an average pace of 0.6% per year, while productivity in the wider economy has been growing at about 1.6% per year. Peng’s analysis of the underperformance finds that technological changes, regulation, and measurement issues have all likely played a role.
The relative underperformance of construction industry labor productivity is a common trend across advanced economies
How has a lack of innovation hampered the construction industry?
One partial explanation for the underperformance of the US construction industry is that there hasn’t been much innovation, according to Peng. Most of the major machines used for construction today—including bulldozers, concrete mixers, and cranes—have been available since the 1950s.
“Since then, technological changes within construction have been incremental,” Peng writes.
The share of industrial machines in total construction costs increased sharply from 1948-1968—from 4% to 12%—reflecting a spike in innovation and adoption of new technology. But the share decreased to 10% in the 1970s and has remained at that level ever since.
Similarly, pre-fabrication technology—which helps speed up construction by producing components of buildings in off-site facilities—was widely used between 1960-1970, contributing about one-third of the total new residential housing units annually at its peak. Its use has persistently declined since then, now accounting for just 5% of new residential housing units.
“In addition to a lack of direct innovation, the construction industry also benefited very little from technological advances in other industries,” Peng writes. Major technological breakthroughs over the past 50 years have been concentrated in industries like information, communication, and chemical manufacturing, all of which are quite distant from the construction industry’s supply chain.
As a result, other industries like pharmaceutical manufacturing and professional management have benefited much more from the spillover effect of innovation elsewhere in the economy compared with construction.
Goldman Sachs Research finds that a 1% increase in industry-level innovation intensity can boost annual productivity growth in the industry by about 0.2 percentage points.
“Our estimate implies that technological changes have only boosted annual construction productivity by 0.8 percentage points since 1965, below the 1-1.3 percentage boost we estimate for other industries,” Peng writes.
The impact of housing regulation on construction
Increasing housing regulation has also been a drag on construction productivity growth. On average, Goldman Sachs Research finds that a 1% increase in country-level regulation intensity lowers annual construction productivity growth by 0.6 percentage points—or 0.9 percentage points after controlling for other contributors to productivity growth such as investment intensity and labor quality.
“Our estimate implies that increased regulation in the US since the 1960s has likely reduced annual construction productivity growth by 0.7 percentage points, offsetting much of the estimated 0.8 percentage point boost from technological changes,” Peng writes in her report.
Land use regulations can take many forms. Peng finds that delays in approvals tend to impose the largest drag on construction productivity growth. Rules restricting the size and height of new buildings also weigh on productivity growth, likely because they lead to inefficient investment decisions. State political involvement, local approval requirements, and impact fees (charges on new developments to help pay for the infrastructure improvements needed to accommodate them) can also weigh on productivity growth by raising the barriers for new developers to enter, which reduces competition.
Among all G10 countries, the US has implemented the most stringent changes to land use regulations, which now represent one of the main drivers of the housing shortage in the US, Peng writes.
Housing continues to present a major affordability challenge in the US—both for renters and homeowners. In a separate report, Peng writes that the unaffordability of owner-occupied housing, in particular, poses more than just a cost of living problem. Owner-occupied housing is a primary way that many households, especially low-income households, save and build wealth. In the US, neighbourhoods offering high-quality public schools and other public amenities are also predominantly owner-occupied. As a result, the high cost of buying a home “also means higher barriers to building wealth and more limited access to education services, job opportunities in large and growing cities, and long-term social mobility,” Peng writes.
Are economists measuring construction output correctly?
Mismeasurement issues might also play a role in the productivity question. Failure to account for improvements in housing quality when measuring construction output prices could be causing a persistent downward bias to real construction output and productivity, Peng writes.
Similarly, official statistics use the residential housing price index as a deflator for nonresidential structures, which could also result in a drag on annual construction productivity growth.
Without these potential mismeasurements, average annual labor productivity growth in the US construction industry from 1990 to 2024 would have been -0.3% rather than -1.0%, Peng writes.
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