Puzzled by the Productivity Slump

Clown World’s economists are perplexed by the “strange and awful” 50-year decline in US construction productivity.

Measurement error alone cannot explain the decline in US construction productivity over the last 50 years, with evidence pointing to the sector’s deteriorating ability to transform intermediates into finished products, and to the allocative inefficiency of construction inputs.

Despite aggregate productivity for the US economy having doubled over the past 50 years, the country’s construction sector has diverged considerably, trending downward throughout that period. And this is no slight decrease. Raw BEA data suggest that the value added per worker in the construction sector was about 40 percent lower in 2020 than in 1970 (see Figure 1).

How can a sector like construction, with average value-added of 4.3 percent of GDP between 1950 and 2020, experience such a precipitous decline in productivity relative to the rest of the economy? To answer this question, researchers have focused on issues relating to data measurement, hypothesizing that measurement errors largely explain this phenomenon. This new research updates some of those efforts and, importantly, extends them to investigate other hypotheses to find the following:

Using measures of physical productivity in housing construction (i.e., number of houses or total square footage built per employee), the authors confirm that productivity is indeed falling or, at best, stagnant over multiple decades. Importantly, these facts are not explained by the incidence of price measurement problems. Instead of data error, the authors investigate two other possible explanations. First, they find that the construction sector’s ability to transform intermediate goods into finished products has deteriorated.

And second, the authors describe the curious fact that producers located in more-productive areas do not grow at expected rates. Indeed, rather than construction inputs flowing to areas where they are more productive, the activity share of these areas either stagnates or even falls. The authors suggest that this problem with allocative efficiency may accentuate the aggregate productivity problem for the industry.

Interestingly enough, US hourly wages have also been stagnant since 1972. Now, whatever could possibly have happened to the labor force that would make it less productive?

It couldn’t possibly be immigration effecting a qualitative change in the workforce, could it? It’s not possible that a predominantly white male work force might be more productive than a sexually diverse, nationally diverse work force, right? No, surely not, because we are reliably informed that immigration is always good for the economy. Just maybe not for wages and productivity and per capita wealth.

But the resultant growth in debt and spending makes up for it, so it’s all good, right?

Even while Clown World is collapsing and burning before their eyes, these wicked morons will be convinced that everything is fine because their spreadsheets produce the expected numbers.