Productivity in the construction industry

26 Aug 2014

This paper examines productivity in the construction industry, in terms of both how productive construction is now as well as how productivity growth has performed over time.

Executive summary

Construction is an important industry in Australia, with sales accounting for $327 billion or some 21 per cent of GDP and its contribution to value added being 7.6 per cent of GDP. Australian Bureau of Statistics (ABS) data allow us to examine and estimate the productivity magnitudes involved in this industry and its components; building construction, heavy and civil engineering construction and construction services. These components account for 35, 23 and 43 per cent of the industry respectively.

The word productivity is often used loosely in ordinary language – here we use it strictly as a quantitative relationship between industry output and the labour and capital inputs. As a measure of output, we use the ‘value added’ created by the industry. In the case of labour inputs, the best measure is hours worked – however, for some purposes we are forced to use simple head counts. Productivity of Australian labour is critically important, being one of the drivers of living standards in the long run.

Generally we find that construction is a productive industry with a value added per worker above the average of all industries and well above the average, if extremely productive industries such as mining are excluded. Some parts of construction such as heavy and civil engineering are very productive, generating productivity 53 per cent higher than the Australian average.

While current productivity is important, so is productivity growth over time. Here we find that since 1994-95, the first year for some of the relevant data series, construction has kept pace over time with the rest of the market sector in Australia. However, when we use the multifactor productivity measure, we find that productivity growth in construction has outpaced the market average by a factor of 35.6 to 10.7 per cent. Part of the reason for this is that capital productivity slumped by 27 per cent in the rest of the economy, while the evidence presented here shows that it increased by 11 per cent in construction.

Over the period since 2007-08 it is possible to examine the productivity performance of the sub-sectors. While the market sector as a whole registered an average annual increase in labour productivity of 3.52 per cent, the average for construction was a healthy 4.81, up to a very high 6.38 per cent for building.

Limited evidence is available that would permit useful international comparisons. However, the information available confirms the present findings – that Australian construction is a highly productive industry displaying solid productivity growth. Recent Treasury figures suggest Australian construction’s labour productivity is twice the US figure.

The profitability of the construction industry is a related issue addressed here. The results show that the profit share – using the wide measure ‘gross operating surplus’ – is a bit under the national average for all industries. This is what we might expect in an industry that is much less capital-intensive than the average. As it happens, when profitability is measured as a return on the industry’s capital, stock construction is by far the most profitable industry. It has a rate of return of 107 per cent compared with the next highest (finance and insurance) at 61 per cent and an industry average of 22 per cent.

When changes over time are plotted, it is clear that the construction industry has witnessed a large shift in incomes towards profits and a subsequent large shift in income away from labour.

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