Since 1970, productivity across most of the American economy has roughly doubled. In construction, it has fallen by around 40%. A new VoxEU column by Dongkeun Choi and Munseob Lee unpacks why.
The fall in the price of equipment — computers, machines, instruments — has been one of the great engines of the post-war economy, adding around 1.3 percentage points a year to growth in output per person. But structures have moved the other way. The relative price of buildings in the US is now 80% higher than in 1970, and that rise claws back almost two-fifths of the gain from cheaper machines. The net contribution of falling capital-goods prices is therefore closer to 0.8 points than 1.3.
“About three-quarters of the drag runs through standard capital deepening. When structures are expensive, firms accumulate less of them, and production slows accordingly. The remainder operates through innovation. Laboratories, offices, and pilot plants are themselves structures. Stagnant productivity in construction raises the cost of doing science.”
This is not an American curiosity. Choi and Lee examine thirteen advanced economies, and all but Belgium sit in the same troubling quadrant: construction prices up, construction productivity down. Across the entire sample, the UK records both the largest fall in construction productivity and the steepest rise in the relative price of building.
Why has construction forgotten how to build? The leading suspect is regulation. Hilber and Vermeulen show that the restrictiveness of the UK’s planning system, more than any physical shortage of land, drives the long-run rise in house prices; D’Amico and co-authors tie America’s construction-productivity stagnation directly to land-use rules. A planning regime that makes every project bespoke, contested and slow has meant construction is one of the few industries that never industrialised — it never achieved the scale economies and standardisation that lifted output almost everywhere else.
This resembles Baumol’s cost disease. When productivity stalls in one sector but the rest of the economy still needs its output, the relative price rises and everyone else pays for it. What makes construction unusual is that there is no way to route around it: the economy cannot make do with fewer hospitals, fewer fabs or — increasingly — fewer data centres. The cost of standing still in construction shows up everywhere.
As is often argued, restrictive planning acts as a tax on housebuilding. But it has also held back innovation in the construction industry. Alongside planning reform, we need to look deeper at what’s made us less efficient at building.