Construction Labor Costs are Rising, but Not Even Close to Increase in Material Price Increases
I read an article today stating that construction employment is up in 45 states last month. Given how busy the construction market is, and should in theory continue to be with government investments in infrastructure, this makes complete sense. Then I went down the rabbit hole: many of the projects we have put out to bid or proposal recently have been coming in at costs higher than expected. Is this due to increasing labor and/or material pricing? The short answer is both, but one in particular.
The supply chain issues since the onset of the COVID-19 pandemic have been well articulated and continue to present times. The lack of labor, due to double whammy of fewer people entering the trades and a mass retirement of people on the tail end of their careers, is also a well know problem. So going further down the rabbit hole, which one is more acutely leading the the increasing cost of construction? It turns out materials pricing has the bigger lever.
While declining 5% since the first quarter of 2022, construction material prices, as measured by the Producer Price Index for Construction Materials, are up over 40% since starting a skyward upward trend in the second quarter of 2020. Keep in mind, the y-axis is relative, with 1982 being pegged at 100.
Labor costs are also up recently, but the increase is much more subtle.
The y-axis on this chart is in dollars. Since 2011, total compensation has increased on an annualized rate of 0.7% per year. Since Q3 of 2021, the annualized growth rate doubled to 1.5%. This is a big jump, but the increase pales to the increases in construction materials.
For the time being, the extraordinary cost in construction can be blamed on material prices. If demand for construction stays at current levels and 1) supply chains get ironed out, and 2) we do not increase the number of people entering careers in the skilled trades, this dynamic could flip and labor costs will be the cause of accelerating construction costs.
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