Tightening Labor Market and Rising Construction Wages for 2016

Spend Matters welcomes this guest post from IHS.

The most notable statistic is the decline in the unemployment rate. Unemployment in construction peaked at 20.6% in 2010 and averaged 7.3% in 2015, the lowest reading since 2007. The last time the construction unemployment rate was in this range, nominal wage growth was 4.0%. This labor market tightness will exert itself on construction wages, with the average industry wage growing 3.1% in 2016. Labor markets for skilled construction workers will be tightest, pushing wage growth to 4.2% in 2016.

The pace of job creation in the construction industry has added just shy of 20,000 jobs per month over the past 12 months. This is the strongest employment growth for the industry since 2006, although it is still well below the 40,000 jobs per month added during the height of the construction boom in 2005. Specialty trade contractors are leading in employment gains, while employment in utility construction was down 3% in November 2015, with the oil and gas component down more than 12%. Low oil prices are driving cutbacks in oil and gas pipeline construction. We expect these cutbacks to continue through the first half of 2016. On the upside, other construction sectors are picking up in strength. We expect residential construction to continue to improve at a double-digit rate in 2016. Additionally, the new transportation bill will boost investment in civil engineering projects. Finally, liquid natural gas and petrochemical plant construction, as well as the construction of 4,500 megawatts of nuclear capacity over the next four years, will offset declines in other sectors.

constructionwages

Overall, the construction labor market is tightening quickly. Improving demand is outpacing available supply and tightening the labor market. Since peak employment in 2007, the construction industry has lost 1.6 million workers to retirement, employment in other industries and labor-force dropouts. With construction activity improving, markets are tightening quickly. The large decline in the construction labor force is already taking its toll in high-growth areas where shortages of skilled workers are developing. U.S. skilled-worker wages will average 4%-plus growth through 2017. Wage growth in skilled occupations will vary depending on geography and skillset. Welders and pipefitters are two occupations experiencing shortages and we are already seeing wages respond through strong escalation.

Bottom line: Construction wages are poised to accelerate through 2018. Tightening markets and improving demand will support wage gains of 3.1% in 2016. Any relief from the downturn in energy markets is being outweighed by the strong demand stemming from a robust pipeline of chemicals and LNG projects and a shrinking pool of available labor.

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