The Strange and Awful Path of Productivity in the U.S. Construction Sector

Aggregate data show a large and decades-long decline in construction sector productivity. This decline in such a large sector has had a material effect on secular productivity growth for the economy as a whole. Prior work has focused on the role of potential measurement problems in construction, particularly output deflators in the measurement of productivity. This paper brings some new evidence to bear on the industry’s measured productivity problems and suggests that measurement error is probably not the sole source of the stagnation. First, using measures of physical productivity in housing construction, productivity is falling or, at best, stagnant over multiple decades. Second, there has been a noticeable decline over time in the efficiency with which construction firms translate materials inputs into output, and a corresponding shift toward more value-added-intensive production. Third, using state-level data, we do not find evidence of patterns of within-industry reallocation that might be expected of efficiently operating input and output markets. States with more productive construction sectors do not see growth in their shares of total U.S. construction activity; if anything, their shares fall. This may point to frictions in these markets that slow or stop what is in many other markets an important channel for productivity growth.