HOW THE MINING BOOM CHANGED THE PROFILE OF THE AUSTRALIAN BUILDING AND CONSTRUCTION INDUSTRY: 2The preceding post introduced a relatively new annual publication from the ABS called Australian Industry (ABS 8055). This uses a sample of private sector firms to get mostly financial data on a wide range of balance sheet items. The data goes back to 2006-07 and has eight main series. As explained by the ABS:
This publication presents estimates of the economic and financial performance of Australian industry in 2013-14. The estimates are produced annually using a combination of directly collected data from the annual Economic Activity Survey, conducted by the Australian Bureau of Statistics, and Business Activity Statement data provided by businesses to the Australian Taxation Office.
The Australian Industry data addresses a number of interesting questions about the structure, profile and performance of the building and construction industry. One is about the skill levels in the Engineering sector, and whether its increased share of industry employment has created a more productive, highly skilled and highly paid industry. How the increase in Engineering has changed the profile of the Australian construction industry is investigated in the charts below.
With Australian Industry’s total private sector employment in 2014 reaching over 1 million people the percentage shares of the three sectors in Chart 4 roughly translate into number of jobs. In 2014 Construction services had 737,000 people employed.
Looking at changing shares of industry employment in Chart 4, the effect of the mining boom saw Engineering increase to 14.5 percent and Trades (as the Construction services are labelled in these charts) fall to 68 percent. Total industry employment went from 973,000 to 1,073,000 between 2006 and 2014, and that increase was due to Engineering’s growth from 91,000 to 156,000. Building and Trades both increased jobs by around 20,000. The increased share of employment went with an increased share of income, to 23.5 percent.
Source Australian Industry ABS 8055.
As Engineering increased its share of industry income, both the Building and Trades shares in the total declined, although income in both sectors was growing. In dollar terms, income for Building was $91 billion in 2006 and $180 billion in 2014. For Trades the figures are $109 billion in 2006 and $150 billion in 2014. Engineering was $39 billion in 2006 and $84 billion in 2014. Total industry income increased from $239 billion to $360 billion and Engineering had 23.5 percent of that greatly increased total.
With a larger increase in income (116 percent) than employment (71 percent) Engineering income per person employed increased steadily. This, not surprisingly, led to higher Engineering wages and salaries, shown in Chart 7. The ratio data in Australian Industry is only given for three years. Higher rates of pay are assumed to reflect differences in skill levels between industries, based on the theory of marginal productivity of labour, although in this case there were also important demand-side factors that drove up pay scales on big resource projects. Engineering average wages and salaries have always been double those for Trades, and 80 percent higher than for Building, due to a highly skilled workforce with more professional and technical qualifications.
Value added was another structural industry characteristic at the subdivision level significantly changed with the growth of Engineering. In Chart 8 the doubling of its share of industry value added to 24 percent saw the Trades lose 12 percent of their share of the total. This was a straight trade-off because Building’s share didn’t change. Between 2006 and 2014 industry total value added rose from $75 billion to $128 billion, so Engineering’s increased share was significant.
Source Australian Industry ABS 8055.
So, by the end of the mining boom the profile of the building and construction industry had significantly changed. Engineering’s increased share of the industry’s employment, income and value added has increased the numbers of higher skilled and higher paid workers, while the number employed in the less qualified Construction services subdivision has barely risen. The question is whether this new-look industry will last.
The missing employment in Construction services is interesting, because of the expectation the increase in residential building (see Chart 1) over the last few years would also increase Trades employment. This could partly, or largely, be a result of the shift to more capital intensive, higher density and high rise residential developments. High-rise building also uses a lot more prefabricated components than traditional detached housing, although houses are generally becoming more modular and work is shifting to off-site factories.
Source Australian Industry ABS 8055.
The value added per person data is also interesting, although three years is a short period. As a measure of output per person employed this is an estimate of labour productivity. Over the last three decades, for the industry as a whole, there has been a very small to negligible increase in construction productivity. In this short series based on accounting data the three sectors have followed very different paths. Trades are flat, Building is up by 11 percent, and Engineering value added per person increased by 27 percent. Three reasons for that increase are suggested below.
The income/qualifications effect noted above will have supported the increase in Engineering value added per person, but the main drivers of productivity are technical progress and the amount of capital per worker. The most important source of long-term productivity growth is investment in new plant and equipment, buildings and structures, software and intellectual property, with the new technology embodied in current machinery and IP that replaces older versions. The heavy equipment and large machines involved in engineering work, for example in civil engineering, makes this a much more capital intensive sector than Trades and Building. How much more we don’t know because we don’t have capital stock data at the subdivision level.
The third factor is more abstract. Goran Runeson and I wrote a book chapter a few years ago where we argued the construction industry was dividing into two distinct industries. One was traditional building and construction, doing mainly small to medium size local projects. The other was an emerging group of major contractors, operating in national and international markets. Many mining boom projects were managed by one or another of these international firms, Bechtel alone had the three Curtis Island LNG projects. Further, many of the clients of these projects were very experienced, and to an extent, intelligent clients with a good understanding of what their project entailed. Despite the problems encountered during the boom, such as resource shortages and remote sites, these firms seem to be good at managing for productivity on their projects.
There are two obvious possible futures for Australian building and construction over the next decade. The industry could revert, and return to something similar to the pre-boom profile, with Trades expanding their share of output as Engineering contracts. This is the less skilled industry with lower pay and lower productivity, and is more labour intensive. The second version is a permanent structural change to an industry with a larger and growing high skilled, high value added component. It’s a more capital intensive industry doing larger projects. This new-look industry would be sustained by infrastructure projects, in transport and power for example, and an increasing amount of high-rise building, both commercial and residential.