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Labor Costs Follow Construction Materials Price Declines
As the nation’s recession deepens, labor costs represent the largest concern—and expense—for many contractors. While recent construction materials price declines represent a positive factor in the industry’s outlook, declining labor costs would be relatively more helpful. Indeed, data suggest construction labor costs are on the way down.
Between January 2008 and January 2009, the construction industry lost 747,000 jobs. Remarkably, construction ranked only fourth in terms of the volume of jobs lost, which means labor demand is in steep decline across all industries. During the past year, retail, wholesale, transportation, manufacturing, and professional and business services all shed more jobs than construction.
By January, the nation’s unemployment rate was 7.6 percent, a 16-year high, and many economists believe unemployment ultimately will peak well above 9 percent during the course of this business cycle.
Earnings Data
Recently released data from the Bureau of Labor Statistics (BLS) confirm labor costs are now declining on a per-hour basis. To put this into context, in 2007, which represents the last good year for the economy, average weekly earnings increased between 1 percent and 2 percent in real terms on a 12-month basis. One year later, average weekly earnings were declining. For example, between July 2007 and July 2008, average weekly earnings were down 2.8 percent in inflation-adjusted terms.
Data specific to construction exhibit the same trends. In 2007, average weekly earnings were still expanding in real terms. Between September 2006 and September 2007, average weekly earnings expanded 3.1 percent in the construction industry. Shortly thereafter, average weekly earnings began to decline on a year-over-year basis. By the summer of 2008, average weekly earnings in construction were declining more than 2 percent on a year-over-year basis.
That said, the data are somewhat difficult to interpret. As gasoline prices rocketed above $4/gallon during mid-year 2008, real weekly earnings predictably declined. During the past two months for which data are available (November and December 2008), average weekly earnings economy-wide and in construction returned to positive territory due to dramatically decelerating inflation.
During times of economic distress, employers typically respond by laying off employees who are the easiest to replace from a skills perspective. As a result, lower-level staff is often the first to be released to the market, resulting in an increase in average weekly wages because the labor market becomes disproportionately populated with more highly skilled personnel.
Because of the various factors that impact the weekly earnings data, it is often more useful for business owners to analyze employee compensation data from BLS, which does not adjust for inflation.
According to BLS data, employee compensation growth decelerated markedly during 2008. In early 2008, compensation for construction workers was expanding at a 4 percent annual rate. During the last quarter, however, employee compensation was up just 3.5 percent on a year-over-year basis. Further deterioration is expected during the final quarter of 2008 and during the initial portions of 2009.
For goods-producing sectors, which include construction and manufacturing, compensation increased only 2.7 percent on a year-over-year basis, which largely reflects the disproportionate weakness of the nation’s manufacturing industries. Compensation in service-providing industries increased 2.8 percent during the past year, but is set to decelerate as the recession engulfs retail, professional services, finance and many other service sector components.
Bargaining Power The implication of the data is that construction industry managers have gained significant bargaining power in recent months. This bargaining power should continue into 2009 and probably beyond.
Importantly, construction job openings have declined dramatically during the past two years, which means existing employees enjoy fewer options. The construction job openings rate, which is defined as the number of job openings divided by the sum of employment and
job openings, fell from a cyclical high of 3 percent in February 2007 to 0.9 percent in October 2008, according to BLS. The total number of job openings in construction declined from 237,000 in February 2007 to 67,000
in November 2008—representing a decline approaching 72 percent.
Predictably, the construction separations rate, which represents the number of total employee separations as a percentage of total employment, has been climbing. In November 2007, the monthly separations rate stood at just 4.3 percent. One year later, it was 6.6 percent. The implication is that the typical construction worker is considerably less secure in his employment than in the recent past.
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Friday, September 3, 2010