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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO JULY 2000 NUMBER 155 Chicago Fed Letter Understanding the (relative) fall and rise of construction wages Over the last four years, wages of construction workers have risen modestly relative to those of other workers, partially reversing what had been a nearly continuous 25 year decline. As figure 1 shows, the ratio of average hourly earnings in the construction industry to that of all private production workers rose throughout the 1960s. In the early 1970s, when the construction industry was at the center of the concerns that led to the imposition of wage and price controls, construction workers earned about 45% more per hour than the average worker.1 Following that peak, however, relative construction wages declined steadily until 1995 when they were only 15% above average. The recent rebound has seen that figure increase to about 17%. The rebound in construction wages has come in the midst of a construction industry boom. Housing demand is at historically high levels and shortages of construction labor have been reported across the country. The construction sector has gained in its share of gross domestic product (GDP) and employment, as shown in figures 2 and 3. Moreover, the gap between the construction unemployment rate and the overall unemployment rate recently narrowed to its lowest level in the past three decades, indicating the tightest labor market in construction since the 1960s (see figure 4). Indeed, given the tightness of construction industry labor markets, it might seem surprising that construction wages have not risen even faster. Understanding the forces that have restrained wage growth during the recent boom as well as producing the long decline in relative wages since the early 1970s requires a look at how the industry has changed over the last three decades and how its role in the U.S. economy has developed. 1. Construction to private hourly earnings percent 150 140 130 Impact of economywide changes 120 Certain economy-wide changes seem to have 110 1960 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 affected the construcNote: Monthly data. Shaded areas indicate recessions as defined tion industry more by the National Bureau of Ecomomic Research. than other industries. Source U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. Investment in structures increased in the 1990s, but declined significantly as a percent 2. Structures investment share of GDP of GDP from the late percent 1970s to the early 1990s. 11 The upward movement of residential construcTotal tion has masked the 8 often flat level of nonresidential construction (see figure 2). Although Residential the 1980s experienced 5 great economic growth, investment in structures Nonresidential lagged behind the rest 2 of the economy. This 1960 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 seems to reflect the Note: Quarterly data. Shaded areas indicate recessions as defined by the National Bureau of Ecomomic Research. cyclical nature of the Source: U.S. Department of Commerce, Bureau of Economic Analysis, construction industry National Income and Product Accounts. as overbuilding in the 1970s resulted in less earnings in construction (though not activity in the following decade. available for all states) currently vary Regional economic growth in the from highs of $26.87 for Alaska and last two decades was also uneven, as $24.76 for New York to a low of $13.74 the South and West grew faster than for North Carolina in April.2 the rest of the U.S. This geographic National labor market trends have tilt to growth may have lowered relaalso played a part in restraining the tive wages in the construction indusrelative wages of construction workers. try since wages tended to be lower in For instance, the mix of workers in the higher growth regions, aside the U.S. has changed dramatically from the Far West. Average hourly 3. Construction share of total employment percent of wage and salaried workers, seasonally adjusted 7.3 6.8 decline in the relative wage of high school dropouts observed between 1980 and 1995 can be attributed to immigration.”6 Impact of industry changes The substitution of 5.8 less-skilled workers has been facilitated by advances in construction 5.3 1960 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 process and method. Note: Monthly data. Shaded areas indicate recessions as defined Cost-saving technologby the National Bureau of Ecomomic Research. ical changes in the conSource U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. struction industry have shifted the skill sets needed for projects. over the last the three decades, as De-skilling in construction, especially more women, minorities, and immioff-site work like pre-fabrication, has grants have entered the work force. lessened the need for high-wage skilled Because they receive lower wages workers, allowing firms instead to hire on average, these new entrants have laborers at lower wages. Builders talk dampened wage growth in general. of being able to “… manufacture a But they have had an especially large house in nine hours, erect it in 12 impact in construction where a high hours, and finish it in 48 hours—all proportion of jobs require low skill using unskilled workers.”7 Technologilevels. Women accounted for 9.9% cal progress has led to new construcof construction workers in 1999, up tion materials and techniques, many from 5.6% in 1972.3 Since for the of which reduce the need to hire more construction trades, women’s median skilled workers. The seasonal cycles weekly earnings were $423 in 1999, of the construction sector are having whereas men’s median weekly earnless impact due to new equipment ings were $571, the increasing share and better knowledge of how to overof women in construction has recome Mother Nature. For instance, strained average wage growth.4 Inheaters and insulated work areas allecreasing shares of minorities and viate the effects of cold weather on immigrants in construction have had construction workers. New drying similar implications for average contechniques let builders use concrete struction wages. Immigrants are beall year round. Thus, workers are less lieved to have played an especially able to demand a wage premium to large role in helping to ease the labor compensate for a lack of hours during crunch in construction. slow seasons. Another important labor market facMoreover, increased safety, at least tor has been the increase in the wage partially attributable to better safety premium associated with higher levels programs and new techniques, has of education.5 Because construction lessened the wage premium related workers tend not to have high levels to the riskier nature of construction. of formal education, such increases From a peak in 1979 to a low in 1998, in the returns to education have the the incidence rate of nonfatal occupaeffect of lowering their relative wage tional injuries and illnesses declined rates. The influx of less skilled immiin the U.S. In the construction indusgrant workers may be one factor contry, these rates declined from 16.2 to tributing to lower relative wages for 8.8 per 100 full-time workers. This less educated workers. For instance, decline was steeper than the overall some researchers contend that “almost drop for private industry from 9.5 to half of the 10.9 percentage point 6.3 6.7 per 100 full-time workers. Interestingly, the manufacturing industry now has a higher incidence of occupational injuries and illnesses, even though the construction industry was less safe prior to 1994. However, in 1998 there were more occupational fatalities in construction (1,171 with 33% in falls) than in manufacturing (694).8 Effects on unionization As the industry shifts toward using fewer skilled workers, the wage-boosting power of labor unions is eroding and labor markets are becoming more competitive. This shift especially follows from the many day laborers now hired in the informal sector of the economy. Faced with less market power on the side of labor, firms have been able to offer lower wages and still fill positions, at least until the current boom. Also, the traditional edge in productivity enjoyed by union workers has significantly lessened. “The reduced productivity gap gave owners and contractors tremendous incentives to switch from union to nonunion labor.”9 Union influence has diminished in the construction industry over the past three decades. As more nonunion employees were hired at a lower wage rate, the average hourly earnings in construction declined. Union construction workers earn over 50% more than nonunion workers.10 The gap in benefits appears to be even greater, as unionized workers have much better benefits than nonunion workers.11 Lower representation is a primary reason for the loss of wage power by unions. The building trades were over 40% unionized in 1972.12 In 1999, only 19.1% of construction workers were union members, though this was a higher percentage than the membership low of 17.7% in 1995. Besides a national decrease in union representation, higher growth in states that have legislated the “right to work” of non-union employees, especially in the South, contributed to this decline. Weakened prevailing wage laws, which essentially mandate union wages for workers on public works projects, Double-breasting by firms permits a single percent company to operate 24 union and nonunion shops. “The open shop branch of a 18 Construction double-breasted firm is supposed to be a 12 separate concern, with its own offices, management, and payroll. 6 Unions have charged Nonagricultural that in many cases 0 these distinctions are 1960 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 artificial and that the Notes: W + S is wage and salaried. Monthly data. Shaded areas indicate recessions as defined by the National Bureau of Economic Research. union contract legally Source U.S. Department of Labor, Bureau of Labor Statistics, applies to the nonCurrent Population Survey. union subsidiary.”15 Still the practice has spread as firms respond to prevailing wages and vanishalso factor into the lessening of union ing productivity advantages for union influence over wages in the construclabor. The added flexibility enables tion industry. “Critics of these laws a firm to bid for government congenerally claim that the creation of tracts under prevailing wage laws, an artificial (union-based) wage floor while also being competitive for reduces competition and tends to 13 private contracts. inflate building costs.” However, in 1993 Congress increased the thresholds on the size of construction proConclusion jects to which the Davis–Bacon Act The labor market for the construcof 1931 applies. For new construction tion industry has been especially under $100,000 and repair projects tight after the construction boom of under $25,000 firms now do not have the 1990s. This has resulted in wage to pay prevailing wages. This has alincreases beyond those found in lowed construction firms to win more other industries, departing from the federal contracts without paying union long-term trend of downward relative wages, thus weakening union power. wages for construction workers. HowAnother area of change in prevailing ever, the long-term trend suggests wage laws allows helpers to replace continued de-skilling in the construchigher paid apprentices at job sites. tion sector, which will lead to further The helpers are less skilled than apdownward pressure on wages. In prentices and can do more of the view of this, the recent relative wage manual labor that otherwise would gains for construction workers may have to be done at greater cost. An not be sustainable. additional tactic to lower costs is to —David B. Oppedahl hire apprentices outside of approved Associate economist programs. Both of these tactics have led to court cases involving builders 11 Michael H. Moskow, 1997, “Construction and government entities. A Supreme industry wage controls during the Nixon AdCourt ruling in 1997 clarified that ministration,” paper presented before the apprenticeship programs need proper meeting of the Industrial Relations Research Association, December. certification at the state or federal level, which increases employer costs.14 2 Bureau of Labor Statistics data. Typically, the hiring of apprentices or helpers still lowers wage bills, 3 Calculated from the Bureau of Labor Statiscompared with hiring journeymen. tics, Current Population Survey. 4. Private W + S unemployment rate 4 Available at http://stats.bls.gov/news.release/ wkyeng.t07.htm. 5 Economic Report of the President, Feb. 2000, pp. 135–137. 6 George J. Borjas, 2000, Issues in the Economics of Immigration, University of Chicago Press, p. 6. 7 Quote from Wally Randa in Matthew Power, 2000, “Assembly required,” Builder, February, p. 67. 8 Data from OSHA, available at www.bls.gov/ oshcfoi1.htm and www.bls.gov/special.requests/ ocwc/oshwc/osh/os/osnr0009.txt. 9 Steven G. Allen, 1988, “Declining unionization in construction: The facts and reasons,” Industrial and Labor Relations Review, Vol. 41, No. 3, p. 357. 10 Based on data from the Current Population Survey, available on the Internet at http://stats.bls.gov/ news.release/union2.nws.htm. 11 Albert Schwenk, 1996, “Trends in the differences between union and nonunion workers in pay using the Employment Cost Index,” Compensation and Working Conditions, September, pp. 27–33. 12 Daniel Quinn Mills, 1972, Industrial Relations and Manpower in Construction, MIT Press, p. 16. 13 Gerald Finkel, 1997, The Economics of the Construction Industry, Armonk, NY: M.E. Sharpe, p. 129. 14 Supreme Court of the United States, 1997, No. 95-789, February 18. 15 Allen, op. cit., p. 358. Michael H. Moskow, President; William C. Hunter, Senior Vice President and Director of Research; Douglas Evanoff, Vice President, financial studies; Charles Evans, Vice President, macroeconomic policy research; Daniel Sullivan, Vice President, microeconomic policy research; William Testa, Vice President, regional programs and economics editor; Helen O’D. Koshy, Editor. Chicago Fed Letter is published monthly by the Research Department of the Federal Reserve Bank of Chicago. The views expressed are the authors’ and are not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System. Articles may be reprinted if the source is credited and the Research Department is provided with copies of the reprints. Chicago Fed Letter is available without charge from the Public Information Center, Federal Reserve Bank of Chicago, P.O. Box 834, Chicago, Illinois 60690-0834, tel. 312-322-5111 or fax 312-322-5515. Chicago Fed Letter and other Bank publications are available on the World Wide Web at http:// www.frbchi.org. ISSN 0895-0164 Tracking Midwest manufacturing activity Motor vehicle production (millions, seasonally adj. annual rate) Manufacturing output indexes (1992=100) 8.0 April CFMMI IP Month ago Year ago 163.9 149.5 163.2 148.3 152.3 140.2 Light trucks 6.6 Motor vehicle production (millions, seasonally adj. annual rate) June Month ago Cars Year ago Cars 5.7 5.8 5.5 Light trucks 7.1 7.2 7.1 5.2 Purchasing managers’ surveys: net % reporting production growth May Month ago MW 55.2 59.3 Year ago 60.9 U.S. 56.3 58.2 58.7 3.8 1997 1998 Light truck production decreased slightly from 7.2 million units in May to 7.1 million units in June. Car production remained constant at 5.8 million units in May and 5.7 million units in June. The Chicago Fed Midwest Manufacturing Index (CFMMI) rose 0.4% from March to April, reaching a seasonally adjusted level of 163.9 (1992=100). Revised data show the index was at 163.2 in March, and had risen 1.1% from February. In comparison, the Federal Reserve Board’s Industrial Production Index for manufacturing (IP) increased 0.8% in April, after rising 0.9% in March. The Midwest purchasing managers’ composite index (a weighted average of the Chicago, Detroit, and Milwaukee surveys) for production decreased to 55.2% in May from 59.3% in April. The purchasing managers’ index decreased in Chicago and Milwaukee, but increased slightly in Detroit. 1999 2000 Sources: The Chicago Fed Midwest Manufacturing Index (CFMMI) is a composite index of 16 industries, based on monthly hours worked and kilowatt hours. IP represents the Federal Reserve Board’s Industrial Production Index for the U.S. manufacturing sector. Autos and light trucks are measured in annualized units, using seasonal adjustments developed by the Board. The purchasing managers’ survey data for the Midwest are weighted averages of the seasonally adjusted production components from the Chicago, Detroit, and Milwaukee Purchasing Managers’ Association surveys, with assistance from Kingsbury International, LTD., Comerica, and the University of Wisconsin–Milwaukee. Return service requested Public Information Center P.O. Box 834 Chicago, Illinois 60690-0834 (312) 322-5111 FEDERAL RESERVE BANK OF CHICAGO Chicago Fed Letter PRESORTED FIRST CLASS MAIL US POSTAGE PAID CHICAGO, IL PERMIT 1942
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