Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He is a University Professor and Director of Cities at the University of Toronto’s Martin Prosperity Institute, and a Distinguished Fellow at New York University’s Schack Institute of Real Estate.
Construction industry productivity in the U.S. is lower today than it was in 1968—and it won’t pick up unless it can embrace modernization.
There’s at least one thing many urbanists and Donald Trump appear to agree about: America is indeed stuck in a building crisis. Its infrastructure is dilapidated and failing, and housing prices are surging in a superstar economy in part because we don’t build enough of it.
But it is not just sagging federal spending or onerous land use restrictions that are to blame. America’s construction industry face a staggering productivity crisis. And it’s not just a U.S. issue: A report released today by the McKinsey Global Institute concludes that global productivity in the construction industry has stagnated.
In the U.S., industries as varied as agriculture, retail, and manufacturing have increased productivity 10 to 15 times since 1945, but the productivity of the construction industry has barely budged. This is a huge problem both for housing costs and for employment, since the construction industry is one of its most important sources of higher-paying low-skill jobs. The construction industry is responsible for substantial spillover effects in the broader economy, generating $86 of additional economic activity every $100 of construction sector activity, according to figures from the U.S. Bureau of Economic Analysis for 2012.
The United States isn’t alone here: Across the globe, the productivity of the construction industry has grown at a veritable snail’s pace. Today, construction spending adds up to $10 trillion globally—roughly 13 percent of global economic output, a figure which is projected to grow to $14 trillion by 2025. But the industry has generated a meager 1 percent of annual growth over the past 20 years compared to 2.8 percent overall and 3.6 percent for manufacturing.
The productivity of the construction industry varies widely by nation. The chart below from the report shows how various nations around the world stack up. The United States is in the upper left quadrant—a declining leader, along with Italy, France, and Japan. Mexico and Brazil are true laggards in the lower left hand quadrant. China and India are accelerators in the lower right. Israel, Belgium, Australia, and the UK, among others, are outperformers in the upper right quadrant.
America’s construction industry productivity, the report notes, is lower today than it was in 1968.
Of course, construction isn’t really a single industry—it’s an agglomeration composed of many and varied sectors. There is a signal divide between large corporations engaged in industrial and infrastructure construction and the multiplicity of small, fragmented players on the residential construction side. Productivity varies widely between these two segments. In the U.S., productivity is increasing significantly over on the industrial/infrastructure end; it’s the smaller residential construction trades that are getting clobbered.
The nub of the problem is that the infrastructure and heavy industrial segment makes up just 38 percent of the industry, while the traditional real estate sector (including larger residential and commercial buildings, as well as single-family homes) makes up 62 percent of the industry. The former has generated productivity more than 100 times the industry average, while the residential builders and traditional construction trades lag at 20 percent below average.
So, what can be done about this? The report calls for a global effort to modernize and upgrade the construction industry across seven broad areas:
- Reshape regulation and raise transparency
- Rewire the contractual framework
- Rethink design and engineering processes
- Improve procurement and supply-chain management
- Improve on-site execution
- Infuse digital technology, new materials, and advanced automation
- Reskill the workforce
These changes would result in productivity gains of 50 to 60 percent, the report claims. That could add $1.6 trillion in global economic output per year—roughly the size of Canada’s economy. It’s an amount that would enable the world to cover half the world’s infrastructure needs from growing urbanization.
In other words, the global housing and infrastructure crises are largely a product of a backwards construction industry—and things won’t get better until we bring it into the 21st century.