Structural Aspects of Australian Construction

 Employment, income and value added

 

Australian construction has significant structural characteristics. Small and micro firms account for nearly two thirds of activity and employment compared to medium and large firms, and over three quarters of the industry is found in the three largest states. This post first looks at the differences between the states using data on industry employment and income. The second part looks at the employment and value added shares of the four different sizes of firms. 

 

State shares of employment and income 

 

The construction industry in Australia is highly concentrated in the three largest states of New South Wales (NSW), Victoria and Queensland, which account for 78 percent of construction employment, with a combined share of NSW and Victoria of 57 percent.

Including the Western Australia (WA) share of employment of 12 percent brings the total for the four states to 90 percent, so the share of the rest of Australia made up of the Australian Capital Territory (ACT), Northern Territory (NT), Tasmania and South Australia (SA) is only 10 percent of the Australian total.  As Figure 1 shows this is also the case for income, although NSW and Vic have slightly larger shares of income than employment.

 

Figure 1. State shares of employment and income

 

Source: ABS. RoA is Rest of Australia: Australian Capital Territory, Northern Territory, Tasmania and South Australia.

 

There was not the same distribution of employment across the states in the past. In 2008 the number of people employed in NSW, Victoria and Queensland was almost the same, around 250,000 each (which then like now was 77 percent of the Australia total). Employment in WA increased during the mining boom 2011-14 but fell afterwards and is still below the level of 2014. Employment has been increasing since 2012 in NSW and in Victoria since 2016. In Queensland employment did not regain mining boom level until 2021, and has since increased significantly. As Figure 2 shows, compared to 2008 by 2023 there was a large difference in employment between NSW, Victoria and Queensland. 

 

Figure 2. Construction employment in major states

 

Source: ABS.

 

 

Figure 3 has the data for the rest of Australia, which shows how the relative size of construction in the ACT, NT and Tasmania is very small, with employment numbers around the 10,000 level. What is striking about those states is the lack of growth in construction employment since 2008, which reflects the low growth in their state economies. In SA there was a 40 percent increase in employment between 2016 and 2023. 

 

Figure 3. Construction employment in small states

 

Source: ABS.

 

This data is from the Australian Bureau of Statistics annual publication Australian Industry for employment in June and sales and service income in the financial year 2022-23. The state level data for construction sales and service income is unique to Australian Industry. For employment the usual source is Labour Force Australia, Detailed which gives full-time and part-time employment by industry for May and August [1].

 

As shown in Figure 1, the pattern across the states for income closely follows employment, with the four major states accounting for 91 percent of the total, and NSW and Victoria 60 percent of the total. However, there are noticeable differences between the states in income per employee. In 2023 the ACT had the highest income per employee by a considerable margin. Why that is the case is not obvious, but may be due to a higher proportion of institutional and commercial construction work compared to the other states. The major states have higher income per employee than the other smaller ones, with the exception of Queensland where income per employee is similar to SA and NT levels. 

 

Figure 4. Comparison of income per employee by state

 

Source: ABS.

 

 

Employment, Value Added and Firm Size

 

One of the other data sets in Australian Industry is on firm size. The ABS breaks industries into Micro firms with 0 – 5 employees, Small firms with 5 – 19 employees, Medium firms with 20 -199 employees, and Large firms with over 200 employees. In the construction industry Micro firms are the great majority, and had 44 percent of construction employees in 2023. However, that share has fallen over the last three years since 2021 when Micro firms were 47 percent of total employment. In 2023 the employment share of Small firms was 21 percent, of Medium firms 22 percent, and Large firms 14 percent. Each of those three categories of firms has increased their share of the total by one percent since 2021 as the share of Micro firms fell by 3 percent. 

 

Figure 5. Construction employment in June

 

Source: ABS.

 

 

Australian Industry also has Industry value added (IVA) by firm size, and this shows an important structural characteristic of Australian construction. There is a big difference in the 33 percent share of total construction IVA for the Micro firms is compared to their 47 percent share of total employment, and this much higher share of employment than IVA is indicative of a low level of productivity in Micro firms. 

 

As Figure 6 shows, for Small firms the shares are almost equal at 21 and 20 percent for employment and IVA respectively, and for Medium firms the shares are 22 and 26 percent. However, for Large firms there is a big difference, with a 14 percent share of employment compared to 21 percent of IVA, so there is a much higher level of productivity in the few Large firms than all other construction firms. Australian Industry does not give the number of firms in each category, but previous surveys have found less than 1 percent of construction firms are Large. 

 

The value of IVA per person employed can also be compared: for Micro firms it was $100,000 in 2023, for Small firms $124,000, for Medium firms $157,000, and for Large firms $195,000. Clearly, Medium and Large firms have higher levels of productivity measured as IVA per employee, with Large firms having nearly twice the IVA per employee as Micro firms.

 

 

 

Figure 6. Share of Industry by size of firm

 

Source: ABS.

 

This suggests reducing the number of micro firms would raise construction productivity, but it may not be so straightforward. Many of the micro firms will be doing repair and maintenance work, which is typically much more time and labour intensive than new builds. That is why knock down and replace is often preferred over major refurbishment. Amalgamating micro firms into small or medium ones that do the same work is unlikely to have much effect on overall industry productivity if the nature of the work is the primary cause of the low level of productivity, not the size of the firm. The issue here is the inclusion in Construction industry statistics of firms ranging from the micro local trades to large national contractors. 

 

This highlights the need for better data on construction work so repair and maintenance, alterations and additions, residential and non-residential building, and engineering construction are identified with the work done by contractors and the trades allocated to the main type of work. This would provide more relevant measures of productivity, allowing the labour input to each type of work to be estimated and matched to the value of work done. 

 

 

Conclusion

 

Australian construction has some striking structural characteristics. Activity and employment is highly concentrated, with the two states of NSW and Victoria accounting for half of the industry. Adding Queensland and WA brings that to 90 percent of industry employment and income. Because the other four states and territories account for only 10 percent of the industry’s employment and income, policies targeting the construction industry need to consider the major role the four big states, and particularly NSW and Victoria, will play in their success.

 

The structure of the industry is a pyramid made up of a wide base of many micro and small firms with a layer of medium sized firms in the middle, and a top containing a few large firms. Although those large firms are less than one percent of the number of firms, they employ 14 percent of the people and produce 21 percent of industry value added. Medium and large firms have much higher levels of productivity, measured as IVA per employee. For large firms this is $195,000, nearly twice the micro firm IVA per employee of $100,000.

 

The low level of productivity the micro and small firms that are the great majority of construction firms affects the industry level. Many of these firms are trades doing labour intensive work in residential repair and maintenance where there are few productivity gains available. Because industry statistics include this work with new work done in building and engineering construction the overall level of industry productivity is lowered, and productivity increases in new work from mechanisation and automation will tend to be cancelled out as growth in the size of the stock of buildings leads to an increase in the amount of repair and maintenance work required. 

 

 

[1] In Australian Industry the total number of people employed is not exactly the same as that found in the ABS Labour Force Australia, Detailed, the usual source of data that has full-time and part-time employment in May and August. For example, the Labour Force data for August 2023 had a total of 402,344 employed in NSW construction compared to the Australian Industry estimate for June of 390,300 people. For Australia the LabourForce had 1,295,076 as total employed in construction in August 2023, and Australian Industry had 1,250,100 employed in June. There is no breakdown of employment between full-time and part-time in Australian Industry.