Labor and Profit
During a question and answer session at a recent industry conference, a home builder asked Moody’s Analytics chief economist Mark Zandi for his thoughts about the labor situation in light of young people not being interested in entering the trades.
Zandi replied that construction labor wages will increase, and builders should expect less profit from the houses they close in the years ahead.
He noted that profit margins for U.S. corporations have been growing every year for more than 30 years. According to the Fed, business profit as a percent of the national gross domestic product hit a post-WWII high of 10.6 percent during the second quarter while GDP going to workers in the form of compensation has dropped steadily since the 1970s from 50 percent to 42.2 percent last year. That trend will begin reversing soon.
A Conference Board report projected the labor shortage risk for 450 occupations between 2012 and 2022 with skilled construction jobs, such as masons and structural iron and steel workers, ranking well above average. Some jobs will remain vacant because there will be more workers retiring from those positions than new job seekers available for hire.
“It will be significantly harder to control labor costs without losing labor quality,” said Gad Levanon, director of macroeconomics and co-author of the Conference Board report.
As the economy continues to grow and barring any change in labor force participation and immigration, the U.S. economy will have more jobs than people to fill them by 2018, according to a 2010 Northeastern University study. Perhaps a preview of what labor availability will look like can be seen in the Oklahoma City area. An abundance of work created by the destruction from the 2013 tornado drove up the cost of materials and labor.
Worse yet, subcontractors were harder to find during the spring and summer. One builder complained that he requested three crews from his best electrical contractor and didn’t get a return phone call for a week. When the sub responded, he explained that all his guys had quit to work for a contractor who offered more money. While roofers were on one of his other projects, an insurance contractor came to that job site and hired them away. “We went fifty to sixty days where we couldn’t get a roof on our house,” he said.
The labor shortage will “scream for immigration reform,” said Zandi. Reform could offer relief but judging from the Capitol Hill gridlock, the adage “winners go to market while losers go to Washington (to lobby)” could ring true. Industry trade groups and builder assocations might launch recruiting and training outreaches, but new entrants won’t come quick enough and in large enough numbers to make a dent in the shortage. Charles C. Shinn Jr., of Builder Partnerships. Littleton, Colo., says the smart builders will have to ask themselves how do I get the trades to want to work for me, so I won’t have to share in the trade shortage. Paying more than the other guy isn’t a silver bullet, but having more “team” in your operation reduces the chance of losing your trades. CB
