Marcum has analyzed the latest in a series of annual data focused on the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS). These analyses are tailored to the informational requirements of construction industry leaders.
The construction industry continues to be defined by elevated demand for labor but too few available workers to fill those jobs. That dynamic—acute skilled labor shortages—was present before the pandemic and has been become significantly worse in the three years since covid-19 upended the economy and altered the composition of the U.S. workforce.
In the first two months of the pandemic, construction lost about 1.1 million jobs, a decline equivalent to 14.2% of the industry’s workforce. It took nearly two years—until December 2021—for industry employment to return to February 2020 levels. As of January 2023, the most recently available data as of this writing, there are roughly 7.9 million people on construction payrolls. That’s about 3.6% more employees than the industry had at the start of the pandemic.
But that’s approximately 400,000 fewer construction employees than there would have been, based on the 2015 to 2020 pace of hiring, had the pandemic not occurred. Yes, demand has played some small part in this employment shortfall, but worker scarcity is the more pressing and systemic issue at hand.
The sectoral composition of the industry workforce has also changed dramatically in the roughly three years since the start of the pandemic. The residential construction workforce has expanded at a significantly faster pace than the remainder of the industry, increasing 10.1% since February 2020. Put another way, residential construction accounted for 39.0% of all construction workers in at the start of the pandemic. As of January 2023, that share had risen to 41.4%.
This should come as little surprise. Residential construction boomed in 2020 and 2021 due to a number of factors including a desire for home offices, a tremendous increase in retirements, and other lifestyle factors that upped the demand for new homes. While elevated mortgage rates have slowed some of the homebuilding industry’s momentum, the fourth quarter of 2022 set a record for the greatest number new homes under construction since the Census Bureau began tracking it in 1970.
The nonresidential industry has fared less well, and that’s reflected in the segment’s workforce, which is currently 0.5% smaller than at the start of the pandemic. Soft demand for certain types of construction, including in the office segment which has been negatively affected by the advent of remote work, has certainly impacted the segment’s demand for work, but labor shortages are the bigger issue at play.
Worker Shortages Economy Wide
The construction industry has been dealing with labor shortages since well before the start of the pandemic, but now virtually all segments are also struggling to find enough workers to fill their open positions. In February 2020, there were 7.1 million open, unfilled jobs across the entire economy, close to the all time high set in November 2019. By March 2022, job openings had spiked to a new record of 11.9 million. Put another way, over a three-year period, the number of open, unfilled jobs rose by more than 4.8 million, an increase of 69.2%. Prior to the pandemic, there had never been a month in which morethan 4.7% of all jobs were unfilled. During 2022, an average of 6.8% of all jobs were unfilled each month.
There are several causes of this sudden and severe shortage of workers, but the biggest is elevated retirements. Demographic factors were already disadvantageous, and the combination of a deadly pandemic and a surge in asset values during 2020 and 2021 enticed many Baby Boomers to retire sooner than they otherwise would have.
According to a recent report from the Federal Reserve, “as of October 2022, the retired share of the U.S. population was nearly 1.5 percentage points above its pre-pandemic level… accounting for nearly all of the shortfall in the labor force participation rate.”
This has led to stepped up competition for workers, with many industries, like the distribution segment, competing for the same workers that could otherwise end up in the construction industry. The increased prevalence of remote work has also led many jobs to compete with amenities instead of, or in addition to, pay, though worker scarcity has certainly put upward pressure on wages.
The upshot is that contractors are now forced to compete with other industries, not just other contractors, for workers, and the result has been an industry labor shortage that’s as severe as ever.
Construction Industry Struggles to Find Workers
The construction industry averaged 390,500 open, unfilled positions in 2022, by far the highest recorded level over the 21- year period for which the Bureau of Labor Statistics has data. As of January 2023, one in twenty (5.0%) of construction jobs were unfilled.
The shortfall of labor has caused contractors to hold on to workers that they otherwise wouldn’t. On average, just 1.8% of all construction workers were laid off each month in 2022, by far the lowest rate on record.
Workers, on the other hand, have been empowered by the labor shortages to jump from job to job, or industry to industry, in search of better pay or more lifestyle-friendly amenities. The construction industry quit rate (i.e., the share of construction workers that quit their job each month) averaged 2.5% during 2021 and 2022. Over the previous decade, the construction industry quit rate averaged just 1.8%.
The chart below shows how the quit rate, which has historically been lower than the discharge/layoff rate, has edged higher over the past three years.
The result of these labor shortages has been rising wages, slower project delivery due to understaffing, and likely an increased tolerance for what would otherwise be considered subpar performance. Unfortunately, demographic factors suggest that absent intervention, worker availability won’t improve in the near future.
If all construction workers were to retire at the age of 61, which is the average age of retirement, according to the CDC, approximately one quarter of the industry workforce would be retired by 2028.
Simply put, the construction industry’s workforce is as old as it’s ever been, with more than one in five workers currently 55 years or older. The youngest segment of the industry’s workforce has shrunken in recent years, and just one in ten construction workers is 24 years or younger.
These same demographic factors are a headwind for most economic sectors, and as Baby Boomers retire en masse over the next decade, labor shortages will likely worsen for both the construction industry and the broader economy.
A recent model published by Associated Builders and Contractors indicates that, on top of the normal pace of hiring, the construction industry must bring in 541,000 new workers to meet the demand for labor in 2023. Complicating the matter, many of these workers will need to learn specific trades, as labor shortages are more severe for specific occupations like electricians and carpenters. The number of carpenters, for instance, has decreased by nearly 4% since 2011, while the number of overall construction workers has risen by more than 30%.
Construction prices have already increased precipitously since the start of the pandemic, with materials costs up by more than 37%, and ongoing labor shortages and the resulting upward pressure on wages will put further pressure on costs. With a gloomy economic outlook for the second half of 2023 and beyond and elevated borrowing costs, high construction costs could have dire effects on construction activity. The upshot is the construction industry must take drastic steps to ensure that the workforce is sufficiently sized to meet the demand for labor.
By Joseph Natarelli & Anirban Basu, Marcum Accountants, Advisors- www.marcumllp.com
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