Building Employment From the Ground Up

By Jennifer Ridgeway & By Kyle Uphoff
May 2008

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The struggles of the housing market and the spillover effects in the construction industry have been getting a lot of attention recently. When the market for new homes slows, people in construction-related jobs – from brick masons to electricians to painters – often wind up in the unemployment lines. Minnesota hasn’t been immune to the national housing construction slowdown. This article looks at regional employment in construction, both residential and nonresidential, and in related industries in manufacturing, trade and finance.

Construction employment in Minnesota

The construction industry accounts for more than 133,000 payroll jobs in Minnesota. More than 60 percent of employment is with specialty trade contractors, which includes firms engaged as contractors or subcontractors in skilled trades like painting, electrical, and plumbing and heating (see Figure 1). Twenty-three percent of jobs are in building construction. Specialty contractors and building construction industries are most affected by changes in the economy that impact business and personal spending. Heavy and civil engineering construction is largely funded by public dollars for the construction and maintenance of bridges, tunnels, sewers and roads. For that reason it is discussed less in this article.

Construction employment is primarily small business employment. The vast majority of construction firms with payroll jobs (86 percent) have fewer than 10 employees.¹ That is a larger share than the average among other industries. Over 30 percent of employment is also concentrated in that smallest size class (see Figure 2). The largest construction-related occupations in firms with paid employees are carpenters, construction laborers and electricians. Together they account for one in four construction jobs in the state. Architects and engineers, plumbers/pipefitters/steamfitters, and construction managers are among the highest paid in the industry.

In addition to these payroll jobs, thousands of one-man and one-woman construction operations exist across the region. According to the U.S. Census Bureau, there were more than 48,000 such firms in 2005. That makes “self-employed” construction employment 36 percent as large as payroll employment in the industry. Seventy-three percent of these firms worked as specialty trade contractors. Nationwide about 21 percent of construction workers are self-employed or unpaid family members. Note that there are likely also a significant number of firms of one or more workers that operate “off the books,” either full-time or as a side business, but we are not able to quantify them.

Construction employment follows population growth trends

Population in Minnesota grew steadily in recent years. Between 2000 and 2006 the state added more than 311,267 residents (166,424 households). Various factors besides population growth drive construction activity though, from general economic conditions and consumer spending to interest rates and the availability of current housing stock. Growth in various mortgage practices — including subprime lending or loans to people who do not qualify for the best market rate — also fueled growth in the housing market in recent years.

Construction employment grew more quickly than total employment in the late 1990s. With the 2001 recession, growth slowed considerably, although the industry did not witness annual losses until recently. Employment patterns differed somewhat following each of the recessionary periods shown in Figure 3, and marked differences in key interest rates likely were a factor. The 30-year fixed-rate mortgage averaged just over 6 percent from 2001 to 2006, which was considerably lower than rates near 10 percent in 1990 and 1991 and rates that hit 16 percent in 1981 and 1982.²

Growth after the 2001 recession was driven by gains in residential building construction and specialty trade contractors. Residential building employment has since tapered off and started to decline. Nonresidential construction on the other hand saw significant rates of job loss in 2001 through 2004, and it did not add jobs again until 2005 (see Figures 3 and 4). Data available for nonemployer firms (generally self-employed construction workers without any paid employees) for the years 2002 to 2005 show steady but diminishing growth rates in the overall construction industry. In the cases of residential building construction and specialty trade contractors, growth in nonemployer firms was significantly higher than in firms with employees.

The health of the construction industry also spills over to related industries. Most manufacturers with connections to construction witnessed losses or little growth in the years after the recession — a trend that has continued into more recent years (see Table 2). Most wholesale firms have maintained steady growth over recent years, although more recent developments in the housing market may retard future growth. As a group, related retail industries — such as furniture stores and building material and supplies dealers — grew between 2000 and 2004, but employment has been down in recent years. Related service industries such as banking, real estate and mortgage services witnessed very rapid growth between 2000 and 2004. Many of those related industries saw double-digit declines between 2004 and 2006.

The bubble effect and what’s to come
It is difficult to pinpoint exactly when the housing bubble burst, and some industries are just now starting to feel the ripple effect of the housing crisis. The drop in residential construction employment that started in 2004 has deepened since then, reaching a 17 percent year-over-year drop in second quarter 2007. Losses in various construction-related industries have also intensified. Conditions are not expected to improve in the coming months. Short-term employment projections for the state predict 0.6 percent year-over-year job loss for second quarter 2008.

Those conditions may send a message that construction jobs are a bad career choice. That message may be an unfair reaction in an industry where employment levels are inherently cyclical, reacting to changes in the economy, interest rates and even the weather. According to the U.S. Bureau of Labor Statistics, while the number of job openings in construction may fluctuate from year to year, it is rare that all segments of the construction industry are down at the same time, allowing many workers to switch between types of construction (e.g., residential versus commercial) depending on demand. Of course, construction employment is greatest in more populated areas, and construction workers often have to travel to different job sites.

Employment projections suggest that residential construction will grow in the future at a rate lower than the regional average (7.8 percent versus the state average of 12.8 percent), but the industry will add 1,373 new jobs to the economy between 2004 and 2014. Nonresidential building construction is projected to grow at a rate of 16.8 percent (2,158 new jobs), while specialty trade contractors will grow 14.6 percent (12,027 new jobs). In addition to workers needed to fill new jobs, employers will hire to fill jobs made available when someone leaves an occupation. The median age of construction workers in Minnesota is about 39 years, but over one in three workers are 45 or older. Large numbers of younger construction laborers may pull the median down; median ages for some skilled trades and supervisory positions are older. Sixty-one percent of construction inspectors, 43 percent of architects, and 40 percent of operating engineers nationwide are 45 years or older. Turnover rates are also slightly higher in construction than the state industry average, adding to replacement hiring needs.

The industry rewards workers who weather its cyclical nature by paying higher than average wages for many jobs. Table 3 lists employment projections and median wages for some of those construction-related jobs that are expected to be most in-demand in Minnesota over a longer period that smoothes out those cyclical impacts that periodically depress job opportunities. Note that this information considers only those employees in firms. Construction is a field well-suited for those interested in self-employment (see Figure 6 for occupations with large shares of self-employed workers).

For more information about current job conditions by industry, see the results of Minnesota’s Job Vacancy Survey at www.deed.state.mn.us/lmi/publications/jobvacancy.htm. Employment projections by region are available at www.deed.state.mn.us/lmi/tools/projections The U.S. Department of Labor has also created a magazine with construction career information aimed at youth. It is available online at www.careervoyages.gov/indemandmagazine-construction.cfm .

 ¹Payroll employment data available in the Quarterly Census of Employment and Wages is collected through records from the state Unemployment Insurance (UI) system. Firms subject to UI generally have paid employees. These data cover 97 percent of employment, but they typically omit firms without paid employees.

²Source: Freddie Mac. Online at www.freddiemac.com

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