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MainStreet Macro: Inflation’s construction zone

July 17, 2023 | read time icon 4 min

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Last week delivered some good news: Inflation was up 3 percent from last year, the slowest 12-month increase since March 2021.

Inflation was even lower in many areas of consumer spending, but one part of our economy that is continuing to see prices soar is shelter.

When the Bureau of Labor Statistics measures the cost of shelter, it examines monthly rental payments and calculates a proxy for what homeowners would pay every month if they rented, instead of owned, the houses they live in. The bureau also considers hotel stays and other lodging away from home.

With all these inputs combined, shelter was to blame for 70 percent of June’s 3 percent increase in inflation.

One reason housing costs are soaring is that there’s not enough of it. Residential construction, and construction more generally, has been hamstrung by soaring material prices and a labor shortage. While materials inflation has slowed as supply improves, builders have struggled with labor shortages for more than a decade. 

This week, MainStreet Macro digs into construction to tell you why it’s so important to the inflation outlook.

Skills are required

When you think of construction, large commercial buildings or big public works projects such as bridges might instantly come to mind.

But among all the occupations in this large sector, only 23 percent of workers are employed in the construction of commercial buildings, according to the Bureau of Labor Statistics. And heavy construction and civil engineering account for only another 14 percent.

In fact, the lion’s share of U.S. construction workers, more than 60 percent of them, work in specialized trades as electricians, carpenters, and plumbers. These categories require high levels of training, and workers who have the necessary skills can command a premium when it comes to pay.

Wages are higher

The median salary for construction workers, at $58,000, is already higher than the median of about $49,000 for all U.S. industries, according to ADP data.  

On top of that elevated base, construction jobs have been experiencing accelerated wage growth. In June, the median salary for construction workers was up 5 percent from a year earlier, outpacing the 3.8 percent growth in pay we saw overall that month.

New construction hires – those who started at a new job within the last three months –  had an average starting salary of $43,680, up 2.5 percent from a year earlier. That’s higher than the $35,360 average for industries overall, a level that was flat in June from a year ago.

The ADP Research Institute also looked specifically at construction workers for whom we have a year’s worth of pay data in our Pay Insights report. This information can help us dive deeper into who is benefitting the most from higher pay.

When we look at that subset of skilled laborers, those who stayed in the same job over the past year received a pay bump of just more than 6 percent, in line with other industries.  

But we found that these in-demand workers can boost their pay a lot by switching employers. Job changers in construction saw their pay rise by 14.6 percent year-over-year, a bigger increase than the 11,2 percent pay increase we saw for job changers overall.

Main Street is the main employer

According to ADP data almost half of employers in construction are businesses with fewer than 50 employees.

That means construction tradespeople are critical to the Main Street economy. But because they’re too few in number, they have a big impact on the cost of housing in the United States, and an outsized role in inflation.