17 Comments

A single family house, and even more so, a hospital or warehouse, is not the same facility in 2023 as it was as recently as 1990 or 2000. The added complexity of these facilities, in terms of building controls, access egress controls, greater energy efficiency, more stringent environmental impact requirements, etc. both gives the facilities higher value to their. users, but also increases the required skill level of the workers building them and adds labor hours, as well as additional components like Cat-5 wiring, more complex AC units, etc. Some of the resulting cost increase is captured by increases in material and equipment input costs, but definitely not all of it. Prof. D. Quinn MIlls of MIT and Harvard wrote about this in the 1980s.

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Feb 1, 2023·edited Feb 1, 2023

I would agree with the above comment. The amount of building legislation and controls now are much higher than in the past. However, this has increased consultant fees and downtime onsite significantly, as the systems to control quality are underdeveloped as the industry is quite risk averse, and local governemnt is slow to adapt new technology. So while the quality has increased, so has the amount of re-work, downtime and overall project timeline.

Despite increased quality of construction, the overall standard of living (for housing) is less than in the past as people cannot afford the to buy a house!

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It sounds like the Census index is attempting to account for that with its "constant quality" adjustment, and as a result it doesn't appear to deviate too much from CPI until the 00's. The cost of home construction, even accounting for higher quality, seems to have become significantly more expensive over the last twenty years.

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Could this be an example of Baumol Cost Disease in action? If another sector, such as automotive, was experiencing productivity improvements, then the value of one hour of work in the automotive sector is higher, and so automotive wages could rise. Many job-seekers who would have gone into construction can earn more in the automotive sector. So in order to attract new workers the wages in the construction sector would have to rise as well, even if there had not yet been enough compensating productivity improvement in the construction sector.

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This is what I was going to say as well. Obviously, to the degree that we can make the construction process more efficient with regards to labor it can be mitigated. But that is very difficult to do.

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Feb 3, 2023·edited Feb 3, 2023

Seems like the clear answer, should be discussed. https://marginalrevolution.com/?s=d*mn

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This is also discussed very often in context of outpatient care and medical costs.

(Thanks for bringing it up! I was going to post something similar, a link to https://slatestarcodex.com/2017/02/09/considerations-on-cost-disease/)

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This is baffling. I think about the cost savings measures deployed in each of these trades. Those are not showing themselves anywhere.

For example, cordless nail guns and saws should result in much faster carpentry. And my experience with low-rise would lead me to conclude that this is the case. This should surely be reflected in the delivery costs. But it's not.

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Straight up mind-blowing. I really can't believe the steady march up in price for over 100 years, and yet, there it is.

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Is this a world wide phenomenon? The US is often compared to Nordic countries for instance. Has anywhere held the line? Does modular off-site construction help? Just curious if there's a model to look to for guidance. I've have my own thoughts about this but haven't actually seen data compared. For that matter can an apples to apples comparison be made?

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The period 2000-2020 seems to be marked by above-CPI cost rises that are driven neither by labour costs nor by material costs. Could the driver instead have been a combination of land prices and permitting costs (particularly given rising Nimbyism)?

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Thank you for creating such an informative and research-driven piece. I would be curious to learn how some of these trends compare to the value growth over time of publicly traded construction and real estate development firms. My take is that part of the reason we haven’t seen significant productivity or cost-efficiency gains is that many firms “do just fine” financially without such gains. DR Horton, Lennar, Pulte, Aecom, and others have done quite well over time in the public markets despite (or perhaps because of?) the trends that you have researched. I’m interested in why that is and what it means for the future of development and construction in the US.

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If these firms are "doing just fine" without productivity gains, then it's because project owners are still willing to pay up. We see the same thing in healthcare delivery fee-for-service. IMO it could also be because this industry may be multiple oligopolies. For example, only certain firms are big enough for very big projects; regional markets and regulation crowd out competition, etc.

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Construction costs increase faster than inflation

(except '08)

I will cite your work for clients!

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Thank for the well researched article. Are you aware of any research done on peer countries of the US or regional cost indexes within the US?

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Is this somewhat a story of union strength within the construction sector?

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No. The fraction of workers represented by unions in construction has fallen from around 50% of the workforce in the 1970s to less than 15% today. This is, in part, due to population movement to sunbelt States with right-to-work laws, as well as the fact that many of the things unions fought for earlier (like 40 hour weeks, safety regulation) have been enshrined into Federal and State law by now, so unions have less to offer workers in exchange for their dues.

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