Australian Construction and the Shortage of Workers

 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.  

Construction Employment At Record High In Australia

Employment Increases as Work Done Falls

The number of people employed in construction is at record highs. In the ABS Labour Account for June 2023 there were 1,268,472 people employed, an increase of 135,693 people since 2018, the most recent peak in the volume of work done. There is only a weak relationship between changes in the volume of construction work done and the number of people employed in construction, as Figure 1 shows, employment typically rises or falls by one or two percent a year while the annual volume of work done has changed by more than five percent in nine of the 15 years between 2007 and 2022. 

Figure 1. Construction work done and people employed 

Note: The number of people employed includes all workers in June each year, and comes from ABS Australian Industry. The volume of work done is from the ABS chain volume Value of Construction Work Done, which is expenditure on construction adjusted for inflation.

Figure 1 also shows that, from 2007 to 2010, while the volume of work done was increasing the number of people employed barely changed (by 3,000 people). The 2011 bump in employment was due to increased Construction services employment in public building work done as part of the fiscal response to the financial crisis, and the following year employment fell by half the increase of 2011. The increase in work done in 2012 and 2013 was due to the doubling of Engineering work during the mining boom, which went from $76 billion in 2007 to $158bn in 2013, before falling below $100bn in 2017. The $94bn of engineering work done in 2022 was mainly infrastructure projects in transport and energy. The increase in Construction employment in 2017 and 2018 followed rising residential building, when employment in Construction services also began to increase, and in 2022 there was a total of 1,253,906 people employed in construction, an increase of 121,172 since 2018.

 

There have been significant changes in both employment and the volume of work done at the subsector level since 2011 that are not reflected in the industry’s total work done or total employment, and a more detailed picture emerges when construction employment in the three industry subsectors of Engineering, Building and Construction services is used, and construction work done is divided into engineering work and building work. There is a clear relationship between changes in engineering work done and Engineering employment, and in building work done and employment in Building. When the recent cycles in engineering and building construction are taken into account there are significant differences between the industry subsectors, and a comparison of changes in construction employment and work done since 2007 is below in Table 1, divided inro trough-to-peak and peak-to-2022 time periods. Between 2007 and 2022 the volume of engineering work done rose by 23 percent but the number of people employed by 51 percent and, for Building, work done rose by 36 percent and the number of people employed by 46 percent. Construction services employment rose by 26 percent, less than the 36 percent increase in building work done. 

Table 1. Changes in work done and employment 2007-2022

Industry		Work done	Employed people
Engineering Construction	2007-13 2018-22 2007-22	107% -20% 23%	76% 2% 51%
Building Construction	2013-18 2018-22 2007-22	29% -3% 36%	27% 7% 46%
Construction Services	2013-18 2018-22 2007-22	29% -3% 36%	9% 11% 19%
All Construction	2013-18 2018-22 2007-22	-4% -11% 29%	6% 11% 26%

Note: Engineering employment and engineering construction. Building and Construction Services and building work done.

The long-run averages used in Table 2 take the volatility of the year-on-year changes in Figure 1 out, particularly for work done. At the industry level, the long-run relationship between the average of annual changes in employment and work done is actually stable, with the average smoothing the cyclic variability and the effect of very large projects on the volume of work commenced. Since 2007 the average annual change in work done is an increase of 2 percent, and for employment it is 1 percent. This similarity in the average percentage changes over time indicates that, over this period, the industry has turned inputs into buildings and structures using current production technology (machinery, materials, management etc.) at a high level of technical efficiency. However, there has been no significant change in work done per person employed since 2007 when it was $173,192 and 2022 with $177,446. At the top of the mining boom in 2013 work done per person was $245,353. 

Table 2. Percent change in work done and employment 2007-22

Industry	Work done	Employed people
Engineering Construction	2%	3%
Building Construction	2%	3%
Construction Services	2%	1%
All Construction	2%	1%

Note: Engineering employment and engineering construction. Building and Construction Services and building work done.

 

Construction Services

 

The number of people employed in Construction services began to rise with increasing building work and the end of the mining boom. There were big jumps in 2018 and 2021 when residential building work was peaking in the recent cycle. In 2022 Construction services employment reached 854,000, an all-time high, despite the small decrease in the annual value of work done compared to 2018. Between 2013 and 2022 building work done increased by 25 percent and Construction services employment by 20 percent.

Figure 2. Construction services work done and people employed 

The increase in Construction services employment followed rising residential building work, as Figure 3 shows. Construction services employment began to increase in 2016, and continued to rise as the level of building work done peaked then fell. This increase in employment while the value of work is falling implies decreasing industry efficiency, possibly due to the large number of new and inexperienced workers that entered the industry. However, there have been a number of factors that affected the volume of work since 2020, such as wet weather, the pandemic, interest rates, shortages, cost increases and other supply chain issues. 

 

Increasing Construction services employment in recent years is in part due to the increasing number of apprenticeships. The construction trades share of all apprenticeships rose from 12 percent in 2016 to 16 percent in 2022 and the number of people in-training in construction trades increased from 52,700 in 2016 to 70,300 in 2022, when the total number of trainees was 419,600, nearly half the number of people employed in Construction services.

 

Figure 3. Residential and non-residential building work done

What is surprising about Construction services employment is how loosely it is actually connected to changes in the level of work done, both to total construction work and to building work more specifically, where the relationship would be expected to be stronger. However, as Figure 4 shows, in most years there is little connection between changes in the volume of building work done and employment in Construction services, it increased in the last couple of years of the 2014-18 increase in residential building but not during the first few years of the upswing. 

Figure 4. Annual change in Construction services employment

Engineering and Building Construction

The number of people employed in Engineering increased from 91,000 in 2007 to a peak of 160,000 in 2013, before falling to 110,000 in 2017 then recovering to 137,000 in 2022. Between 2007 and 2013 engineering work done increased by 107 percent and employment by 76 percent, accounting for the cyclic rise and fall in productivity discussed in the previous post. 

 

Figure 5. Engineering work done and people employed 

In Engineering, between 2007 and 2022 the annual percentage changes moved in the same direction and by similar amounts in many years, as Figure 6 shows. In some years the change in work done is 20 percent or more, due to the size of the largest projects, with frequent annual changes in employment of 10 percent.

 

Figure 6. Annual change in Engineering work done and employment

There is a similar story for Building work done and the number of people employed in Building construction. Over the recent building cycle, driven by residential building, between 2014 and 2018 the value of work done increased by 29 percent and the number of people employed rose by 27 percent. In 2022 the value of work done was slightly down on 2018, but employment had grown from 224,000 to 239,000 people. 

 

Figure 7. Building work done and people employed

Between 2007 and 2022 the annual percentage changes moved by similar amounts in many years (e.g. 2015-20) but, as Figure 8 shows, in other years there is a lag between changes in building work done and employment. Over time periods longer than one year these annual variations become more closely aligned.

 

Figure 8. Annual change in building work done and employment

Conclusion

For the construction industry, changes in employment numbers have not been closely linked to changes in work done. Between 2007 and 2022 volume of construction work done peaked in 2014 and 2018, but it took until 2016 before employment started increasing. By 2022 the volume of work done had declined from 2018 but the number of people employed had increased to 1,229,000 people, mainly because of the number of new people in Construction services. The volume of work done after 2020 will also have been impacted by pandemic-era supply chain issues, wet weather, interest rates and cost increases, although the extent of the effect is unknown. 
 

Figure 9. Australian construction work done and employment

Between 2007 and 2022 an increase in construction work done generally required more people, but there has been great variation between the subsectors, with significant changes in both employment and the volume of work done at the subsector level that are not reflected in the industry’s total work done or total employment. There is a clear relationship between changes in engineering work done and changes in Engineering employment, and changes in work done and employment in Building.

 

Although the number of people employed in construction has been affected by the composition of work, the relationship is weaker for Construction services, where over twice as many people are employed as in Engineering and Building combined. Construction services employment barely changed during the 2010-14 mining boom increase in engineering work, and if building work done is used still shows a limited relationship between changes in employment and changes in work done. Employment rose as building work increased and residential building work peaked in 2018. In 2022 Construction services employment reached a record 854,000, despite a decrease in the volume of building work done.

 

For the industry subsectors Engineering and Building, annual increases and decreases in employment follow increases and decreases in work done. At this level, annual increases in work done and employment vary greatly over the period 2007 to 2022, but become more aligned over longer time periods. At the peak of their respective cycles, engineering in 2013 and building work done in 2018 had increased by a few percent more than the number of people employed in Engineering and Building respectively, but the changes were similar.

 

At the industry level, the long-run relationship between the average of annual changes in employment and work done is actually stable, with the average smoothing the cyclic variability and the effect of very large projects on the volume of work commenced. Since 2007 the average annual change in work done is an increase of 2 percent, and for employment it is 1 percent. This similarity in the average percentage changes over time indicates the industry broadly has turned inputs into buildings and structures using current production technology (machinery, materials, management etc.) at a high level of technical efficiency. 

 

However, over the last few years the total volume of work done has been falling but employment has increased, which may in part be because many of these new employees have been replacing experienced workers retiring in their 60s. In 2022 there were 130,000 more people (19 percent) in Construction services than in 2016, and over that period employment also increased in Engineering (by 15,000) and Building (by 31,000). Construction employment has been growing strongly for several years, with increasing numbers of apprenticeships and graduates entering the industry, perhaps attracted by the very significant pipeline of major projects that will, in turn, require retention of these workers. 

An increase in employment while the volume of work done is falling implies decreasing industry efficiency, and since 2016 work done has declined by 4 percent while employment has increased by 17 percent. The number of new, inexperienced workers in the industry may be one of the causes of the widening gap between changes in work done and employment since 2020. Labour hoarding during a downturn in the volume of work done due to external factors may also have played a role, as firms retain workers in expectation of future work and potential labour shortages.

In recent years the annual volume of construction work done has been around $220bn. With many major projects still in the planning stage and higher interest rates leading to cancellation or postponement of some projects, building approvals are trending lower and the volume of work done may fall in the short-term. The mismatch between growing employment and a flat or falling volume of work done suggests the industry might have substantial unused capacity at the same time as commencing projects becomes increasingly difficult.

 

Construction Productivity Trends for Building, Engineering and Construction Services

 Australian Construction Productivity at the Industry Level

 

 

The rate of growth of productivity in the construction industry in a number of countries has lagged that of other industries for at least five decades, and the earliest studies that identified this problem date from the late 1960s. Two explanations for the lack of demonstrable improvement in construction productivity are possible. The first is the importance of measurement, data and issues about the structure and use of price indices for estimating real output (i.e. adjusted for inflation). 

 

The second is the nature of the product and the methods used in delivering and managing the processes involved.  Construction is a labour intensive industry in comparison with manufacturing, but there has been a significant increase in the prefabricated component of construction, which could have been expected to lead to productivity growth. Also, construction methods have become more capital intensive as machinery has got heavier, and the number of cranes, powered hand tools and other equipment used has increased.  However the productivity growth that one would expect to observe as a result of these trends has not occurred, according to measurements by national statistical agencies.

 

Productivity estimates require both a measure of labour inputs, such as hours worked or people employed, and a measure of output, called Industry value added (IVA, the difference between total revenue and total costs). IVA is then adjusted for changes in prices of materials and labour to estimate Gross value added (GVA) using price indexes that assume there has been no change in the quality of buildings. Another problem is the application of a single deflator to the diverse range of buildings and structures. This inability to capture functional differences and quality changes in buildings and structures has adversely affected the measurement of productivity, if construction value added is underestimated due to the deflators used, construction productivity has also been understated.

 

This post compares the deflated GVA per person employed to the IVA per person employed for Building, Engineering and Construction services (the trades), and Total construction. The GVA data comes from the ABS National Accounts (chain volume measures of economic activity). The IVA data and number of people employed in June each year comes from ABS Australian Industry. 

 

 

A Proxy for Construction Productivity

 

In Figure 1 industry output is in constant dollars (the deflated value adjusted for price changes). GVA is the quantity of output produced in a year. The employment data includes all workers but not whether they are full or part-time, or hours worked. 

 

Figure 1. Construction Productivity by Industry

Source: ABS, CER

 

As a measure of productivity GVA per person employed is very approximate, typically the number of hours worked would be used for employment and June may not be a representative month for employment in many industries. Nevertheless, this graph looks familiar, with flatlining growth in Total construction productivity over the period, despite a few bumps along the way. It appears to be a useful productivity proxy. 

 

Using the same data, GVA per person employed can be found for Building, Engineering and Construction services. Here a slight decline in Building has been offset by a small rise in Construction services output per person, with the effects of the pandemic on both apparent in the decline over 2020-21. Building construction may have been affected by a shift from commercial to an increased share of residential in the output mix and more high rise work. Because Construction services are generally labour intensive they will have a lower value of output per person, but this data shows there was increase in this measure of productivity between 2007 and 2021 and Construction services was the only one of the three industries to register a gain on this measure. 

 

Engineering construction activity took off in the mining boom from 2010, and output per person has followed the rise and fall in work done since and, although below the peak years of 2012-14, it now reflects the large volume of infrastructure work in transport and energy. Since 2011 GVA per person in Engineering has been much higher than Building construction, nearly twice as much in some years, and Construction services, nearly three times as much in some years. 

 

These differences in output per person employed reflect differences in capital requirements and expenditure on purchases of buildings, structures, software, equipment and machinery (known as gross fixed capital formation or GFCF). The higher the capital requirements, or capital intensity, of an industry the higher the level of output per person employed is expected to be, because workers with more capital are more productive. Both excavators and shovels require one operator but the former shifts more soil.

 

 

Current Dollar Industry Comparison 

 

The chain volume measure of GVA per person employed can be compared to the original, unadjusted current dollar Industry value added (IVA) per person employed. Again, this is an indicative but imprecise proxy for construction productivity. In Figure 2 there is a clear upward trend in all three industries, with increasing nominal value of output as prices rise faster than the number of people employed. 

 

The growth in IVA per employee for Building is the greatest contrast to the GVA data. Here, Building has had a sustained increase since 2012 compared to the flat, no growth trend in GVA per employee. This suggests there has been a better productivity performance by building contractors than the one recorded in official statistics. 

 

Engineering has a similar pattern in both GVA and IVA graphs, with a sharp rise in output per employee after 2010 that flattened out after 2016 at around 50 per cent higher than the pre-mining boom level. This has been a significant increase in productivity. Both Building and Engineering typically have larger firms than found in Construction services, which has lagged the other two industries in growth in IVA per employee. 

 

Without deflation the value of output could be expected to rise somewhere around the rate of CPI inflation, which totalled 35.8 per cent and averaged 2.2 per cent a year between 2007 and 2021. Over that period Building IVA increased by 120 per cent, Engineering IVA by 117 per cent, and Construction services by 50 per cent. More significantly, IVA per person employed for Building increased by 61.6 per cent, for Engineering by 57.3 per cent, but for Construction services only 27.7 percent, suggesting that is where the productivity ‘problem’ lies. However, the IVA and GVA figures are contradictory, with the latter showing better performance. 

 

 

Figure 2. Nominal output per employee

Source: ABS, CER

 

IVA per employee again highlights differences in the capital requirements of industries. In the long run, investment in GFCF determines industry growth rates and their level of labour productivity. Labour intensive industries like Construction services have a low level of IVA per person employed, but also have lower capital requirements. Engineering has always been more capital intensive than Building, but the gap seems to have closed with the increase in residential high-rise activity after 2016. 

 

Conclusion

 

Construction productivity estimates are usually given for Total construction, and typically show little or no growth over many decades. However, Total construction is measure of the combined performance of three different industries: Building, Engineering and Construction services. This post compared the deflated GVA per person employed to the nominal IVA per person employed for Building, Engineering and Construction services (the trades), and Total construction.

 

The deflated GVA per person employed data is a proxy for productivity because the value of output is adjusted for price changes, As a combination of deflated output and employment GVA per person employed looks like a measure of productivity, but while it is indicative that is not really the case. Although similar to the output and input data needed to calculate productivity, indexes of output and input are used for productivity analysis, not the original data, and hours worked not numbers employed used. 

 

When the mostly flat chain volume measures of GVA per person employed are compared to the current dollar IVA per person employed there is a clear upward trend in IVA all three industries, with increasing nominal value of output as prices rise faster than the number of people employed. IVA per person in Building and Engineering has increased at nearly twice the rate of CPI inflation, but Construction services by less since 2007. 

 

Construction services IVA per person employed grew significantly less than Building and Engineering. However, the GVA per person employed performance was much better, the only one of the three industries to register a gain on this measure. Construction services have a large impact on productivity because they account for 60 per cent or more of Construction output. 

 

The usefulness of both GVA and IVA per person employed as a proxy for productivity per person is limited, but indicative. In both cases the difference in capital intensity appears to be the determining factor in the level of productivity (measured as dollars per person employed), and the increase in apartment building would explain the rapid rise in Building IVA per person employed. The effect of changes in output (the mix of buildings and structures delivered) will be explored in another post. Why that increase in Building IVA per person employed was not picked up in the GVA per person employed estimates is also an interesting question.