Reexamining lackluster productivity growth in construction

Abstract

Of all major industries, construction is the only one to have registered negative average productivity growth since 1987. Mechanically, this lackluster performance owes to the fact that indexes measuring the cost of building a constant-quality structure have risen much faster than those measuring the cost of producing other goods. We assess the extent to which growth in construction costs could be biased upward by improvements in unobserved structure quality. Even under generous assumptions, our estimates of the magnitude of this bias are not large enough to alter the view that construction-sector productivity growth has been weak. Next, we calculate new estimates of single-family residential construction productivity growth by state and metropolitan area from 1980 to 2019. These estimates reveal that productivity has declined the most in areas with a larger fraction of construction in the urban core and with tighter housing supply constraints, especially in locations with long permitting times.