Why Has Productivity in the US Construction Industry Stagnated?

Goldman Sachs Research finds that a 1% increase in industry-level innovation intensity can boost annual productivity growth in the industry by about 0.2 percentage points.

“Our estimate implies that technological changes have only boosted annual construction productivity by 0.8 percentage points since 1965, below the 1-1.3 percentage boost we estimate for other industries,” Peng writes.

The impact of housing regulation on construction

Increasing housing regulation has also been a drag on construction productivity growth. On average, Goldman Sachs Research finds that a 1% increase in country-level regulation intensity lowers annual construction productivity growth by 0.6 percentage points—or 0.9 percentage points after controlling for other contributors to productivity growth such as investment intensity and labor quality.

“Our estimate implies that increased regulation in the US since the 1960s has likely reduced annual construction productivity growth by 0.7 percentage points, offsetting much of the estimated 0.8 percentage point boost from technological changes,” Peng writes in her report.

Land use regulations can take many forms. Peng finds that delays in approvals tend to impose the largest drag on construction productivity growth. Rules restricting the size and height of new buildings also weigh on productivity growth, likely because they lead to inefficient investment decisions. State political involvement, local approval requirements, and impact fees (charges on new developments to help pay for the infrastructure improvements needed to accommodate them) can also weigh on productivity growth  by raising the barriers for new developers to enter, which reduces competition.

Among all G10 countries, the US has implemented the most stringent changes to land use regulations, which now represent one of the main drivers of the housing shortage in the US, Peng writes.

Housing continues to present a major affordability challenge in the US—both for renters and homeowners. In a separate report, Peng writes that the unaffordability of owner-occupied housing, in particular, poses more than just a cost of living problem. Owner-occupied housing is a primary way that many households, especially low-income households, save and build wealth. In the US, neighbourhoods offering high-quality public schools and other public amenities are also predominantly owner-occupied. As a result, the high cost of buying a home “also means higher barriers to building wealth and more limited access to education services, job opportunities in large and growing cities, and long-term social mobility,” Peng writes.

Are economists measuring construction output correctly?

Mismeasurement issues might also play a role in the productivity question. Failure to account for improvements in housing quality when measuring construction output prices could be causing a persistent downward bias to real construction output and productivity, Peng writes.

Similarly, official statistics use the residential housing price index as a deflator for nonresidential structures, which could also result in a drag on annual construction productivity growth.

Without these potential mismeasurements, average annual labor productivity growth in the US construction industry from 1990 to 2024 would have been -0.3% rather than -1.0%, Peng writes.

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