Greg Edwards, at the St. Louis Business Journal, called me about the state of the construction industry in Saint Louis. He noticed unusually high wages in the area and wanted to know why they were so high. He also was hearing construction managers complain about the difficulty in attracting new workers. You can access his article in the St. Louis Business Journal; below is the information that I sent to him.
Cost Of Living Statistical Adjustment
In the field of urban economics, we often separate wages definitions into gross wages and net wages, where net wages are adjusted for the local cost of living. Gross wages tell us something about labor productivity and net wages tells us something about local amenities.
San Francisco, for example, has high gross wages. Some businesses are still willing (and in some cases eager) to locate there because the high gross wages are offset by high local productivity. On the other hand, San Francisco has average to low net wages. Some people are still willing (and in some case eager) to locate there because the relatively low net wages are offset by local amenities. (I’ll explain more below.)
Is There A Shortage?
Economists use the word shortage in a narrow sense, where wages are too low to clear the market. If there are no legal restrictions for wage adjustments or migration, then markets will tend to clear on their own.
In my experience, managers and owners use the word shortage to mean difficult or unusually difficult to hire people profitably. But their complaints don’t tell us much. In a healthy economy it is difficult to make a profit, and in some unhealthy economies it is easy to make a profit.
An economic shortage could be caused by a sudden increase in demand for construction workers. A good place to start looking is with the Bureau of Economic Analysis’s (BEA) tables on U.S. production.
The graphic below presents the growth of nominal (not adjusted for inflation) construction growth. I set the index to equal 100 in the year 2010 to see total growth since the bottom of the housing market (for most regions). I chose the three regions with the fastest construction growth since 2010, plus the U.S. average, plus Missouri.
Clearly, construction in the west is growing rapidly, while the Great Lakes region is growing at about the U.S. average. Missouri, which is included in the Plains region, is growing much slower.
The same holds true for population growth. The graphic below shows the population growth for the same regions. Missouri’s population is growing, but at a slower pace compared to the U.S. average. (Missouri has been growing more slowly since about the mid-1970s, not shown here.) It is interesting that the Great Lakes region is growing so slow, yet construction grow is at about the U.S. average.
If there is a shortage, it is obviously not being caused by a sudden increase in demand for construction workers in the region. It may be the case that construction workers and potential construction workers are being pulled out of the state based on higher demand in the West.
Still, we know wages for various types of workers in the trades (mostly in construction) are high in Missouri and the Saint Louis area specifically. High wages and sluggish demand normally don’t go together.
Share of Production
The BEA breaks down production into several parts. The graphic below shows the share of total construction output by three important components: compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (not exactly profit in an accounting or economic sense).
Construction laborers take a much larger share of construction output than the other regions or the national average. And is seems to be growing. Taxes and subsidies don’t seem to be all that important, but it is also clear that gross operating surplus is low and shrinking for the Missouri construction industry.
Why Are Constructions Workers Earning More?
Labor costs are clearly an issue for the Missouri construction industry. I don’t know why, but I can think of a few possibilities.
Construction workers may be enticed to leave the state by better offers from regions that are growing faster. Out-migration will push up the wages for remaining workers. If there is some to the migration, one could find evidence in the PUMS extract of the American Community Survey. I may look into that later this summer. (The BLS doesn’t track migration in the same way, but there may be some evidence of that in their total employment numbers.)
This story can remain true but becomes more complicated when you account for different skill sets among construction workers. Higher skilled workers may be more likely to leave and thus place an acute pressure on employers here.
What is odd about that story is that the Great Lakes region looks the same as the national average. Unemployment is high in that region, which offsets some wage pressure. Again, the American Community Survey may be able to sort some of that out.
Yes, Saint Louis carpenters are paid quite a lot when adjusted for the low cost of living here. But, Colorado firms can hire people at lower wages because of the (mostly) pleasant Colorado weather. The interaction between local amenities and wages or rents are well studied. The bottom-line: when wages are higher after you adjust for cost of living, there is likely something about the location people don’t like.
In other words, even though carpenter wages are higher than other places, they may need to be even higher to compete with the West.
It’s also possible that Missouri construction labor unions are stronger than labor unions in other regions. When I studied this back in 2006 I was not able to find any evidence of extra strength, but Saint Louis seemed to have a labor-union-centric reputation.
Now that Missouri is a right-to-work state, we will see if the labor share remains high.
You may be tempted to promote tech schools. There is nothing wrong with tech schools; actually, I think too many people go to four-year schools. But I don’t think the issue is a lack of trade-school training.
I am working on a migration project this summer. So far it is clear that people with some college (associates degree, tech school, or just some college) are much more likely to move compared to other people. That result tells me that the Saint Louis issue is not about local training, but enticing workers with the skills to move here.