Sector and Firm Dynamics
This continues on from the previous post on Construction in the Australian Economy
For the Australian construction industry, the most widely used data is the value of work done, shown in Figure 4, with the level of activity in residential building, non-residential building and engineering construction. The major phenomena of the last decade was the increase in engineering work during mining boom 1 from 2001-2008 to a historically high level, followed by a rapid rise and fall during mining boom 2 between 2010-2014.
With the end of mining boom, the role of the building sector of the industry in the macroeconomic transition has been important as the contribution from engineering declined. This transition from the resource investment driven economy, when business investment peaked at an all-time high of 18 per cent of GDP, has required growth in residential building to support employment and output. That is currently being tested as the residential building cycle appears to have peaked. There were significant compositional and structural changes in construction during the mining boom, data on which is provided in the annual ABS publication Australian Industry, which uses a wide sample of private sector firms and non-profit organizations to get financial data on balance sheet items. As explained by the ABS:
This publication presents estimates of the economic and financial performance of Australian industry in 2015-16. 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.
Australian Industry provides a useful data set to compare industries with, and to compare sectors (called divisions and sub-divisions) within industries. The data excludes the public sector but includes non-profits in industries like health and education, which are combined with private sector business to get a total for the selected industries, and thus measures the non-government part of the economy. The data goes back to 2006-07.
Figure 5 shows the Total All Selected Industries and the Construction industry’s share for three of the data series produced: employment; wages and salaries; and industry value added, a measure of output. In 2015-16 Construction employed 1.04 million people, 9.7 per cent of the total, paid 11.3 per cent of total wages and salaries, and contributed 10 8 per cent to the output of the non-government sector. (These numbers differ from the National Accounts data above due to the sources and samples used.)
The effect of the mining boom on the economy is an ongoing macroeconomic story. However, while attention has been given to the effects on the main macro indicators of gross domestic product, employment and inflation of construction costs, there has been less discussion about the effects on the building and construction industry itself. At a structural level, there were significant changes in the composition of construction industry output and employment over the last decade, and these have changed the profile of the industry. Data on structural change is given in Australian Industry, for the three industry divisions of Building construction, Heavy and civil engineering construction, and Construction services, the trade subcontractors.
During the mining boom, Engineering construction more than doubled its share of construction output, increasing from 12 per cent to 25 per cent between 2006-07 and 2013-14, when the boom peaked. Over that period the share of Construction services fell from 67 to 55 per cent of the total, while Building was around 20 per cent. By 2015-16 Engineering had fallen to 18 per cent and Building had increased to 24 percent, as shown in Figure 6.
After 2006 industry employment patterns also changed, the mining boom saw Engineering increase to over 15 per cent and Construction services decline to 68 per cent of the total. Total industry employment went from 973,000 to 1,160,000 between 2006 and 2014, and that increase was due to Engineering’s employment growth from 91,000 to 160,000.
Value added per employee is also significantly higher in Engineering, Table 4 shows it is around 30 per cent higher than for Building and double that for Construction services. Higher value added supports higher wages and salaries, which are assumed to reflect differences in skill levels between industries. Wages and salaries per employee in Engineering are twice those in the other sub-sectors, and although in this case there were also important demand-side factors that drove up wages and salaries on big resource projects.
The value added per employee data is an important indicator, although over a short period. As a measure of output per person employed this is an approximation of productivity. Over the last three decades, for the industry as a whole, there has been a small to negligible increase in construction productivity. In this series the three sectors have followed very different paths. Construction services are trending up, Building less so, and Engineering value added per person increased sharply in 2014-15 before falling equally sharply in 2015-16. However, between 2011-12 and 2015-16 value added per employee rose by 37 per cent in Engineering, but by only 17 and 16 per cent in Building and Construction Services respectively.
The role of firms and firm size
The income/qualifications effect noted above will have supported the increase in Engineering value added per person, but the main driver of productivity is 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, all the new technology that is embodied in current machinery and IP that replaces older versions. The heavy equipment and large machines, involved in engineering work like civil engineering, makes this a much more capital intensive sector than Services and Building[i]. Nevertheless, these firms will typically be larger than the great majority of firms in the Building and Services divisions.
Another factor is technological competence. The construction industry has many traditional building contractors and subcontractors, mainly doing small to medium size local projects using standardized technology, but there is also a group of major contractors, operating in national and international markets, that are more technologically and operationally advanced. 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 appear to be good at managing for productivity on their projects.
The number of employees for large, medium and small firms[ii] also followed different paths. Large firms ended up with the same number employed in 2015-16 as in 2008-09. Overall growth in employment during the mining boom was in the medium size firms, and this is the only category that has seen a sustained rise in employees over the period. Employment in Construction services is clearly driven by the level of activity in residential building.
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 Building and Construction services 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. A more productive industry would be sustained by infrastructure projects (transport and power for example) and an increasing amount of high-rise building, both commercial and residential.
[i] How much more we don’t know because capital stock data at the division level is not available. [ii] The size of these firms is not defined. The last Construction Industry Survey had medium size firms employing 6 to 20 people.