Understanding the (relative) fall and rise of construction wages

THE FEDERAL RESERVE BANK            JULY 2000

OF CHICAGO

Chicago Fed Letter

Understanding the
(relative) fall and rise
of construction wages

Over the last four years, wages of con-
struction workers have risen modestly
relative to those of other workers, par-
tially reversing what had been a near-
ly continuous 25 year decline. As
figure 1 shows, the ratio of average
hourly earnings in the construction
industry to that of all private produc-
tion workers rose throughout the
1960s. In the early 1970s, when the
construction industry was at the center
of the concerns that led to the impo-
sition of wage and price controls, con-
struction 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 construc-
tion industry boom. Housing demand
is at historically high levels and short-
ages of construction labor have been
reported across the country. The con-
struction 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 construc-
tion since the 1960s (see figure 4).
Indeed, given the tightness of con-
struction industry labor markets, it
might seem surprising that construc-
tion 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. econ-
omy has developed.

Impact of economy-
wide changes

Certain economy-wide
changes seem to have
affected the construc-
tion industry more
than other industries.
Investment in struc-
tures increased in the
1990s, but declined sig-
nificantly as a percent
of GDP from the late
1970s to the early 1990s.
The upward movement
of residential construc-
tion has masked the
often flat level of non-
residential construction
(see figure 2). Although
the 1980s experienced
great economic growth,
investment in structures
lagged behind the rest
of the economy. This
seems to reflect the
cyclical nature of the
construction industry
as overbuilding in the
1970s resulted in less
activity in the following decade.

Regional economic growth in the
last two decades was also uneven, as
the South and West grew faster than
the rest of the U.S. This geographic
tilt to growth may have lowered rela-
tive wages in the construction indus-
try since wages tended to be lower in
the higher growth regions, aside
from the Far West. Average hourly

110..........................................

1960 ’64    ’68    ’72    ’76    ’80    ’84    ’88    ’92    ’96    ’00

percent

1960 ’64    ’68    ’72    ’76    ’80    ’84    ’88    ’92    ’96    ’00

Note: Quarterly data. Shaded areas indicate recessions as defined
by the National Bureau of Ecomomic Research.

earnings in construction (though not
available for all states) currently vary
from highs of $26.87 for Alaska and
$24.76 for New York to a low of $13.74
for North Carolina in April.²

National labor market trends have
also played a part in restraining the
relative wages of construction workers.
For instance, the mix of workers in
the U.S. has changed dramatically

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