Industry employment and the quantity of work done
This post looks at output and employment in Australian construction over the last few years. Although there have been many suggestions there is a shortage of workers and this is the main constraint on industry capacity, construction employment is now all-time high. Between June 2021 and June 2023 employment increased by 14% while output increased by only 4%.
The construction industry is widely seen as having a serious employment problem, or more precisely a significant lack of workers. In November 2023 Master Builders Australia estimate was the industry will need to attract about 480,000 new workers by the end of 2026 to build enough homes for a growing population. How they got this improbably large number of about 40% of current employment is not explained.
The December 2023 Skills Shortage Quarterly report from Jobs and Skills Australia found fill rates for Engineering Trades Workers (30%) and Construction Trades Workers (38%) suggests ‘skill shortage pressures are most acute for these occupation groups’. (The fill rate is the percentage of advertised positions filled).
Another indicator, the April 2024 HIA Trades Availability Index was -0.58, down from -0.64 at the end of 2023. The index has had a shortage of skilled tradespeople in Australia since 2021, as in Figure 1. This ‘acute shortage’ of skilled trades in 2024 is despite a slowdown in building activity.
Figure 1. Housing Industry Australia Trades Availability Index
Source: HIA
In October 2023 BuildSkills Australia was established by the federal government, as the national Jobs and Skills Council for the built environment sector, to find solutions to the workforce challenges facing the construction, property and water industries. Their March estimate that an extra 90,000 workers will be needed to achieve the National Housing Accord target of 1.2 million homes over five years led to headlines like this one in the Sydney Morning Herald and The Age on March 24: Australia skills shortage preventing Labor's housing goal.
Finally, in response to Peter Dutton’s budget reply speech developers and economists lined up in the Financial Review to argue any limits on skilled migration that reduced construction workers would add to the shortage of skills and workers and further reduce the already remote likelihood of building anything close to a million new homes in the next five years. Residential developers also claimed non-residential building and engineering construction, which are increasing output, are taking workers away from residential building, where output is falling, and making the skills and worker shortage worse.
For all the claims of lack of workers and constraints on capacity it is an inconvenient fact that construction employment is actually at an all-time high. According to the Australian Bureau of Statistics it was a record 1,338,314 people employed in November 2023 and was 1,316,931 in February 2024. There has been significant growth in the number of people employed over the last few years, but over that period the volume of work done has barely increased. That is the issue, why is output not increasing as the number of people employed is increasing? Because it is a relatively labour intensive industry, construction industry capacity is assumed to be directly related to the size of the industry workforce.
The current high level of employment does not, of course, mean there is not a problem with training, skill levels and worker availability, or that there will not be a problem with maintaining the construction workforce in the future, which is aging and has to compete for new workers. And the focus on trade skills means that shortages in professional services like designers, project managers and quantity surveyors are often not included as part of the problem.
Industry Output
The Australian Bureau of Statistics final estimate of the quantity of construction work done is published several months after the quarterly estimates of the value of building and engineering work done. The most recent data is up to December 2023. These chain volume measures of work done adjust value of work done for inflation and are for the volume or quantity of work done. Construction industry capacity is the volume of work that can be done in a year, based on the limits that exist in the supply of materials and the availability of workers.
With the significant increases in prices for building materials and labour costs over the last couple of years the headline numbers for the nominal value of work done have increased by around 40 percent for both building and engineering. Adjusting the nominal value of work done for these price increases to get an estimate of the quantity of work done dramatically changes the picture.
The output or volume of work done by the construction industry has increased over the last few years, but not by much. From the ABS chain volume measure low of $189 billion in 2021 and 2022 it was $196 billion in 2023, and my forecast is $202 billion in the year to June 2024. In the six months to December 2023 the volume of work done was $106 billion, but less work is done between January and June because January is usually the annual holiday and there are other public holidays.
As Figure 2 shows, the increase in work done is due to small increases in non-residential building and engineering construction. Engineering construction was $63 billion in the year to June 2023 (half the record levels of the peak mining boom years of 2013 and 2014) and will be at least $3 billion more in 2024. Non-residential building work done was $54 billion in the year to June 2023 and will be a couple of billion more in 2024. The quantity of residential building work done has been $80-81 billion a year since 2020, and is forecast to be at that level for 2024 (there was $53 billion of residential building work yet to be done in December 2023).
Figure 2. Australian construction output by sector
Source: ABS
Industry Employment
Both Infrastructure Australian and the National Housing Supply and Affordability Council claim skill shortages, a lack of workers and low productivity are the limiting factors on Australian construction output. However, ABS data on construction employment has a record number of people employed in the industry in 2023 and 2024. The most recent ABS Labour Force data had total employment of 1,316,931 persons in February 2024 and an all-time high of 1,338,314 in November 2023. Also. around 80% of people employed in construction are working full-time. Figure 3 shows output and employment since 2007. The chain volume measure of construction work done is over the year to June and employment is for the month of May. Between 2021 and June 2023 employment has increased by 14% but output by only 4%. This is the issue.
Figure 3. Australian construction output and employment
Source: ABS
The number of people employed in construction has increased year after year from 2012, until a slight dip in the Covid years of 2020 and 2021. Then there was a large increase of 168,421 workers in construction between the 2021 low and February 2024, with most of that increase (130,000) between 2022 and 2023.
Is this a shortage of workers in the industry? All the official reports and industry commentators all argue this is the problem, but the number of people employed increased steadily until 2020, and then in 2022 and 2023 grew strongly. Perhaps the ABS is getting its figures wrong and over-estimating the number of people employed. The big increase in 2023 may be revised down in future data releases. However, ABS data is generally reliable and there have been no issues raised with their methodology.
Between February 2021 and February 2024 the increase in total construction employment was 168,421 or 14.7%. For the three industry divisions the increases were 34,616 for Building (10.6%), 22,736 for Engineering (19.5%) and 168,421 for Construction services (15.8%). The increase in Engineering employment reflects the high level of infrastructure work in transport and energy, but Building and Construction services also had substantial growth in employment.
Figure 4. Construction employment by industry division
Source: ABS
An Inconvenient Fact
For all the estimates of a lack of workers and constraints on capacity it is an inconvenient fact that construction employment is at an all-time high, and was at a record 1,338,314 people employed in November 2023. The big increase in employment over 2023 came with a slight increase in output as a small drop in Residential building was counterbalanced by increases in work done in Non-residential building and Engineering construction. The big increase in output was in Engineering work, which is the least labour intensive of the three industry sectors, and over the last 12 months Engineering has actually lost about 3,000 workers.
The largest increase the last few years was over 160,000 more people employed in Construction services, which are the trades. The great majority of these people are usually employed in residential building, so the increase in employment at a time when the volume of residential work has been steady or slightly falling is somewhat mysterious. There may have been more people employed in civil engineering related trades like equipment operators and electrician, but because the ABS does not allocate the trades to the sectors of residential building, non-residential building and engineering it is impossible to know where these people are working. This would be an extremely useful one-off survey to add to their data collection, as was done in recent years for other industries like Professional and technical services and Building cleaning, pest control and other support services. It could also identify the extent of worker mobility across the three sectors in construction, which would be an important addition to the policy framework for improving productivity and housing and infrastructure delivery.
Whether the recent increase in the number of workers will lead to greater industry capacity and an increase in industry output not clear. New workers lack experience and are expected to be less productive than current workers while they get up to speed, a process that can take a couple of years of learning by doing. So there is a potential boost to productivity in the future. On the other hand, over the last few years the industry has employed a lot more people to produce a volume of work that has barely increased. That may be a management problem.
Industry Capacity
There are no official estimates of construction capacity, despite the numerous reports issuing from the various agencies and research organisations about the housing crisis and rising project costs. Infrastructure Australia published their 2003 Infrastructure Market Capacity report in December, where ‘several market capacity constraints are inhibiting the ability of the sector to deliver projects on time and on budget’ (p. 5). These were skills shortages, non-labour supply challenges, and stagnating productivity. On their Public Infrastructure Workforce Supply Dashboard in October 2023 there was a shortfall of over 200,000 workers of which about 130,000 were construction trades and the rest professional services like engineers, quantity surveyors and project managers. The shortage is forecast to double by mid-2025 to over 400,000 workers. The report did not, however, include an estimate of infrastructure construction capacity, which is primarily engineering construction where output volume has increased to over $60 billion a year
The National Housing Supply and Affordability Council (established in 2023) released their first report in May 2024 with a lot of data on residential building activity and forecasts for the next 6 years. But no estimate of capacity as the maximum number of houses and apartments that could be delivered in a year was given. Chapter 3 discusses current supply and demand conditions and the price of housing, and Chapter 4 has projections for new housing supply and demand over the next 6 years finding ‘market housing supply is projected to average around 43,300 dwellings per quarter, or 173,000 dwellings per year … New net market supply is expected to peak at an annual rate of 177,000 dwellings in 2026–27’ (p. 83). Their view is the housing supply system is limited because it is inflexible and unresponsive to demand, with a long-term trend of limited availability of skilled labour, materials and finance, and weak productivity growth.
Industry capacity is the limit on production, a theoretical maximum of what can be produced in a single period. In some cases this is straightforward, based on the installed capacity of paper mills, blast furnaces or other machinery, adjusted for their utilization rate and maintenance requirements. A production line for bottles, chips or cars can produce a set amount day after day, week after week. Construction is not like this.
Buildings bring together many suppliers at many sites. This creates coordination and logistical problems to a degree not found in other industries, shipbuilding for example brings together many suppliers but at few sites. Manufacturing usually has a few suppliers at a few sites. Prefabrication can go some way in solving the many suppliers problem but adds transport and installation costs, and still requires site preparation and coordination. Those sites can be remote, or difficult to access, or have challenging ground conditions. All these and other issues affect the organisation and delivery of projects to a greater or lesser degree. On a large project the set-up costs of the site office and sheds can be significant.
Also, it is hard to optimise the use of machinery and equipment, such as cranes, excavators and hoists. These will be worked as efficiently as possible but can be affected by weather, use rates at different stages of a project, interruptions to site deliveries and other factors outside the project managers control. And despite the increase in plant, equipment and powered hand tools, construction is much more labour intensive than industries it is typically compared to such as manufacturing or mining. While there are significant differences in labour intensity between residential building, non-residential building and engineering, which is high, medium and low respectively in these three sectors when compared to each other, labour intensity is high compared to manufacturing or mining. This makes the number of people employed the key constraint on construction industry capacity.
Why is output not increasing with employment?
Despite the growth in the number of people employed over the last few years the volume of work done has barely increased. That is the issue, why is output not increasing as the number of people employed increase? Because construction is a relatively labour intensive industry, industry capacity is assumed to be directly related to the size of the industry workforce. If the volume of output had increased by the same percentage as the number of workers it would be over $25 billion more in 2023-24.
There are two common answers to this question: inexperienced workers are less productive, or the quality of managers may not be very good so they don’t get high levels of productivity from their workers. Both of these may explain some of the missing capacity, but cannot plausibly explain all of it. I don’t think these are the important factors affecting capacity, instead there are three others that could account for much of the missing output.
First, increased regulation, safety, planning and approval requirements might require more people working on tasks that do not directly produce more buildings and structures. This probably does not affect the trades as much as employment by building and engineering contractors. For example, the 2020 NSW Design and Building Practitioner Act introduced compulsory insurance, declarations to be given by designers and builders to ensure compliance with the Building Code of Australia, and a registration regime for engineers. Other states have also introduced legislation, following recommendations in the 2018 Building Confidence report, to address the problems of defects in apartment buildings, insolvencies and phoenixing that became common during the housing boom.
Second, projects are taking longer to complete. In many cases this might be due to increased size and complexity, and the number of large transport and energy infrastructure projects now under construction will be stretching resources with their requirements for materials and labour. In residential building there has been an increase in high-rise apartment developments, which take years to complete compared to months for a detached house, but all types of residential builds are taking longer and it is not obvious what is causing the increase in completion times. The Commonwealth 2024-25 Budget Papers included ABS data on rates of construction:
Apartment, townhouse and detached house completion times increased nationally by 39 per cent, 34 per cent and 42 per cent respectively over the 10‑year period to 2022–23. Most of this increase is concentrated over the pandemic period, however there has been a relatively consistent upward trend in apartment construction times since 2018–19. (Statement 4: Meeting Australia’s Housing Challenge, p. 141).
Finally, the industry is dealing with new types of occupations and projects, particularly in projects related to the energy transition. It is possible that new types of projects such as wind and solar farms are in the early stages of a learning curve and efficiency and productivity will improve as more are completed. There may also be a problem with the Australian Standards Classification of Occupations (ASCO) not including new roles in construction, for example in data or BIM management, renewable energy and energy efficiency related tasks. Both the Master Builders Association and the Australian Industry Group have argued the pace of occupational change in construction between ASCO revisions results in a growing mismatch between ASCO’s classifications and contemporary job titles or skill sets.
Conclusion
The relationship between construction employment and output has changed over the last few years, as employment has increased but real output has not. As well as the number of inexperienced new workers and the quality of the workforce, there are three other factors that could account for the missing growth in output that the increasing number of people employed could be expected to lead to: the industry may be becoming more labour intensive as projects get bigger and more complex; more people may be involved in digital and design tasks; and regulation becoming more extensive requires more people for compliance.
Projects are also taking longer to complete, and this also needs explanation. There may be supply chain and logistics issues, size and complexity may be affecting the rate of construction, or projects may not have sufficient workers onsite and the work force could be spread across too many projects that are simultaneously under construction. There may be a range factors causing increased completion times, lowering industry capacity and the volume of output.
The ABS could survey the industry to identify what has been causing this increase in project completion times, which might allow policy initiatives that would reduce completion times. It could also survey Special trades workers so they can be allocated to residential, non-residential or engineering work, which would significantly add to our understanding of construction employment at a time when shortages in skills and workers are affecting the capacity of the industry and the output it can produce.
