California Growth and the Construction Paradox

It is often said that generals always fight the last war—and this applies to that still highly overused and abused political catch phrase “jobs, jobs, jobs.” Such rhetoric about creating new jobs continues to be attached to the rollout of almost any new government policy, regardless of the veracity or relevance of the claim.

Times change, as do economic realities and creating jobs is not our challenge or problem today.  Current labor market statistics all tell us that the nation has reached what economists like to refer to as full employment. The headline U.S. unemployment rate is well below 5%, and close to the lowest ever recorded. The expanded U-6 recently dropped below 8%, the lowest level since the late 1990s.

All this is occurring even as the job openings rate for the nation has been at an all-time high for 4 months running. If you’re wondering why this tight labor market isn’t turning into better wage gains—well, it is. Once we control for inflation, wage rates for workers with jobs have been rising at the fastest pace in over a decade. There is still a small amount of slack in the system (primarily younger, blue-collar, males) but not enough to prevent the current labor shortage from becoming acute in the next year or so. It shouldn’t be long before there is a general realization that the problem has rapidly become a lack of “workers, workers, workers.”

California, as it so often does, is leading the nation down this new path. The state unemployment rate is also below 5%. In the San Francisco Bay Area, it is below 4%. The last time these numbers were this low was in the midst of the tech-bubble-fueled economy of the late 1990s. But there is no bubble this time. Indeed, a lack of workers has led to a sharp slowing of employment growth in the state, and it is particularly pronounced along the coast. The fastest growing large economies in the state are now the inland areas of Sacramento and the Inland Empire. This was eminently predictable. Labor force growth in the state has averaged less than one percent over the last decade.

California’s leading national role in the worker shortage is being driven by a lack of housing construction. Anti-growth sentiment, or NIMBY’ism (Not In My Backyard), and high construction costs have constrained new home supply. The state is building only slightly more than 100,000 new units per year. An analysis done by Beacon Economics suggests the number needs to be in the 200,000 range to allow the labor force to expand to the degree needed to maintain job growth at a healthy 2% plus per year. Even more units would be needed if the state is to reduce its current housing shortage and deal with its high share of overcrowded housing units.

There are signs that things may be loosening a bit. Home prices are reaching a point that make it profitable to build even with high land and permitting costs—and this is creating more interest in building. Moreover, the political backlash from high housing costs and the slowing growth in employment is helping some cities to overcome NIMBY’ism. The state has weighed in with a package of new bills that won’t fix the problem, but will give a small short-run boost to the pace of construction.

But there is a new problem on the horizon—who is going to build these homes?

Construction employment hit peak levels in California in 2006. In the recovery since the recession, the state has not come close to reaching those levels. And after years of very little building, many former construction workers have retired, found other jobs, or in the case of some immigrants, gone back home. Today, the industry is finding it difficult to find the skilled workers it needs to man construction sites. Of course, as with any building boom, willing workers could be brought in temporarily from other places. But this begs the question—where are they going to live? While construction work tends to be well-paying for many blue-collar workers, home prices in California today are still beyond a comfortable reach for most.

Nowhere is this catch-22 more painfully illustrated than in Sonoma County—a place that lost 4,000 homes in the recent catastrophic fires and saw thousands more damaged. A tight housing market has become a desperate one as local workers who lost their homes fight to find a place to live while they rebuild. By Beacon Economics’ estimates the rebuilding will need 6,000 construction workers to work for 3 years in the area. This means a 50% increase in jobs for this sector, with no place for these workers to live.

The solution is to find ways of putting economical temporary housing into place rapidly—something the state has not proven very good at effecting. But the first step in this larger problem is to stop talking about jobs, jobs, jobs and start talking about roofs, roofs, roofs.