How can there be a shortage of construction workers? By Scott Sumner

The title of this post is actually two questions in one. One issue is technical, why don’t wages rise to restore equilibrium? And the second is sociological, haven’t we all been reading that there are no longer jobs available for non-college men? And yet, there really does seem to be a shortage of construction workers. Here’s just one article of dozens that I have read:

As the Dallas Morning News notes, between 2012 and 2016, wages for Texas construction workers rose 21.2 percent, compared with 12 percent for all construction jobs in the U.S., and 2.2 percent for all jobs in the state. In Collin County, home to Plano and McKinney, construction workers make $98,000. And that was before the new administration began its immigration crackdown. The Dallas-Plano-Irving metropolitan area is short about 18,000 construction workers–about 20 percent of the total. Which means that many homebuilders literally can’t find people to do the job, and the rest must attempt to pass on higher costs to their customers.

[Update: Ben Cole sent me some data suggesting the $98,000 figure is misleading—perhaps “fake news”. Actual construction wages seem to be much lower.]

You can find similar articles about shortages of skilled factory workers, truckers, and many other blue-collar professions. So what’s going on here?

Let’s start with the technical issue, why doesn’t supply and demand (S&D) restore equilibrium? The problem here is that most labor markets are at least modestly monopsonistic, whereas the S&D model only applies to perfect competition. For instance, suppose a construction company paid its existing workers $26.50/hour. Also suppose it decided that it wanted to double the size of its workforce, because of growing demand for new houses. Under perfect competition there would be a long line of workers, just as good as the existing employees, willing to work for $26.50/hour. In the real world, however, there is a very limited number of potential employees in any given labor market. To attract more workers, you need to raise the wage rate.

OK, but then why don’t firms raise the wage rate to attract those new employees and eliminate the shortage? Here’s where the monopsony model comes in to play. For reasons of employer morale, if you raise the pay of new hires, you need to raise the pay of existing workers. Otherwise the existing workers resent the higher wages of the new hires. Even worse, they’ll jump ship to trying to get higher wages at a competitor firm. If paying a new worker $27.50/hour forces you to raise the pay of each of your 50 existing workers by $1/hour, then the true cost of that worker is not $27.50/hour, it’s $27.50 plus $50, or $77.50/hour. At that price you may refrain from hiring the new worker, and keep looking for someone willing to work for $26.50/hour. When a reporter stops by, you tell her that you face a “shortage” of workers, even though there’s someone willing to do the job for $27.50/hour. That’s what monopsony is all about.

That’s actually the easier question to answer—a shortage is indeed possible, despite the fact that is seems inconsistent with simple S&D. But what about the other question? During the Year of Trump we read 1000 articles about the plight of America’s blue-collar workers, especially non-college men. Why aren’t they willing to do construction jobs in Dallas paying $98,000? That’s more than many college professors make. If both spouses did that sort of work, the family income would be in the top 5%. Why the shortage?

Tyler Cowen linked to an interesting study today:

A poll from the National Association of Home Builders (NAHB) of young Americans ages 18-to-25 shows that almost no millennials want a career in construction — a high-paying industry. 64 percent of these millennials said they wouldn’t even consider working in construction if you paid them $100,000 or more. 74 percent of young adults know what career field they want to pursue, and of these millennials, just 3 percent want a career in construction trades. What’s more stunning is that of the 26 percent who don’t know what career they want, 63 percent of these undecided millennials said there was “no or little chance regardless of pay” that they would work in construction trades.

I’ve done a bit of work in construction—it doesn’t seem like a bad job. So what’s going on here? I don’t know the answer, but I’ll throw out a few possibilities, and ask you for other suggestions:

1. Millennials were more likely to grow up with indoor activities, such as computers games, and less likely to roam around outside. Perhaps that makes them softer. Before everyone jumps all over me, I strongly believe that my (boomer) generation was softer than my dad’s (“Greatest”) generation, which fought in WWII. And that my dad was softer than his grandparents, who were pioneers in the Midwest. That’s progress!

2. In the US, Europe and East Asia, physical work is increasingly done by immigrant workers. But we’ve cracked down on immigration from Mexico, so perhaps that’s contributed to a worker shortage. From the Dallas worker shortage article:

Competition for labor in the housing market has been intense for some time, in part because the flow of immigrants from Latin America has decreased and in part because many people who worked in housing during the boom found other work during the bust. But with the government now openly hostile to the presence of these workers, and starting to deport some of them, it is becoming that much harder.

3. Maybe the prestige of construction work has fallen, partly due to wage inequality and partly due to the fact that it’s seen as “immigrant work”. When I was young, autoworkers often made more than college professors. The problem with this theory is that Dallas construction workers are making good pay—so why is there the perception that construction work doesn’t pay well? Maybe the Dallas figures are outliers, and the national average is far lower.

4. That raises the issue of regional labor shortages. Maybe some unemployed workers in other parts of the country don’t want to move to Dallas. But why not? Maybe their wife has a good job as a nurse, and doesn’t want to move. In the 1960s, wives were less likely to work outside the home.

5. Maybe millennials see construction work as unreliable, recalling the Great Recession, and want something more dependable. In The Age of Complacency The Complacent Class, Tyler says people are less willing to move between states, and even between jobs.

To summarize, I believe that the supposed lack of work for blue-collar men is more complicated than people assume. I do think there is a problem here, how could there be such a widespread perception of a problem, if it did not exist? And we also have wage data that suggests blue-collar wages have tended to rise less than white-collar wages. But I also believe there are more factors at work here than we assume. Just to give one example, a successful Trump policy of bringing back blue-collar jobs might start drawing in more immigrants again, wall or no wall.

There’s more going on here than meets the eye, and a good reporter should be trying to delve deeper into this issue, by interviewing more construction companies and more unemployed blue-collar workers in Texas, to get a sense of why they aren’t matching up.

PS. The monopsony model does provide a theoretical rationale for the claim that a higher minimum wage might not costs jobs. The problem there is that if it doesn’t cost jobs, then a higher minimum wage would also fail to lead to higher prices. But studies show that higher minimum wages do lead to higher prices. (Even studies that find no job loss). So if higher minimum wages really don’t cost jobs, then they do so for reasons that are still poorly understood.

PPS. This post is about more than just construction. I predict that if all illegal aliens were expelled from Iowa, there would be a shortage of Americans willing to work in meat packing plants.