April 1998, Vol. 121, No. 4
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Book reviews from past issues
The Economics of the Construction Industry. By Gerald Finkel. Armonk, NY, M.E. Sharpe, Inc., 1997, 177 pp. $62.95, cloth; $21.95, paper.
The Economics of the Construction Industry is an overview of major economic aspects of the construction industry. The book explores topics ranging from the structure of the industry, popular economic thought and principles, and analytical views of productivity and unions. The author, Gerald Finkel, has hands-on experience in the construction industry due to an apprenticeship in the electrical trade. In addition, he possesses a Ph.D. in labor economics.
The book begins with an overview of the historical development of the construction market. What the book lacks in detail, it makes up for in the number of topics covered. Indeed, many of the chapters discuss subjects that could be books unto themselves. There are three main subjects addressed in this book: industry structure, statistical issues, and union topics.
In the first three chapters, Finkel conducts a broad-based tour of the framework supporting the industry. He argues that there are two main assertions that describe modern construction. One is that modern day builders face the same basic obstacles as ancient buildersnamely issues dealing with variables of building design such as ventilation, structural support, and lighting. The march of technology will continue to shape the choice made by builders, and the author examines major materials used in building (wood, steel, concrete). The second issue is that major social and economic forces have shaped the construction industry. Developments in related industries, such as real estate and manufacturing, also affect the health of construction.
The construction industry is extremely fragmented, with enormous enterprises competing in the same markets as one-person operations. This immense segment of the economy, with more than 2 million businesses operating in 1992, is divided roughly into three sectorsprivate residential, private commercial, and public construction. Private residential construction, the author asserts, is the mainstay of the industry and is strongly linked with the overall health of the economy. Overall, this segment is relatively unstable and slow to respond to business cycle fluctuations. Private commercial construction is overwhelmingly contract work, as opposed to force account work (where a major company basically does its own building). Important issues facing this segment are sources of funding and building complexity. Public construction is subject to local, State, and Federal regulations, making this segment more complex in many instances. Wage regulation is one of the most important issues affecting public construction. All of these segments are open to union involvement, which often impacts the wage structure and job conditions. Finkel explores unions in greater detail later in the book.
Continuing with the industry overview, the author explores construction in respect to classical economic thought. The economic theories of Adam Smith, Karl Marx, and John Maynard Keynes are explored in respect to the construction industry, but no conclusion is drawn from the competing views.
Major statistical issues affecting the construction industry include data availability, productivity, labor market composition, wages, and construction investment. The book gives broad overviews of the basics of these subjects. Constructions contribution to the Nations real gross domestic product is quickly addressed. It has comprised a significant but declining percentage over the years. The composition of the labor market has also varied over the years. In 1972, about 40 percent of building trade employees belonged to unions, compared with about 18 percent today. In addition, more women and minorities have become employed in the construction industry. Sexual and racial discrimination have been problems in the construction industry, and Finkel explores this subject briefly.
One of the largest issues faced by anyone attempting to analyze an entire industrythe availability of statisticsis a subject to which an entire chapter was devoted. Government data from the Department of Commerce and the Bureau of Labor Statistics are available, but often present comparability problems. There are also several private statistical agencies that produce data. Related to this is the measurement of productivity in the industry, and the author covers this issue in two lengthy chapters.
Measuring productivity in construction is inherently difficult, due to the labor-intensive, diverse nature of the industry. A major stumbling point is the issue of skill differentiation among workers. This creates measurement problems that would not exist if workers were interchangeable, as in manufacturing. In addition, the management differences between small and large-scale operations cloud the issue. For example, the pace of work assigned (time required per installation) becomes a determinant of profitability. To increase productivity, builders have opted for materials with lower installation labor requirements such as plastic pipe rather than copper pipe. There is much reliance today on prefabrication of certain parts (which limits the number of hours of workers onsite) making productivity measurement a challenge.
The presence of unions is an issue that has shaped virtually every direction and trend in the industry. Indeed, almost every chapter has some discussion of union activity. One issue in particular is of major debate: productivity in union versus nonunion shops. Several case studies are presented. The work of Steven Allen in the 1980s, which demonstrated the variations in productivity for different types of building activities is described in length. He used production function estimates and discovered a decline in productivity from 1968 to 1978. The conclusion is that increases in building activity of lower skill installations (homes) lead to a reduction in union labor, which may be more skilled due to apprenticeships and journeyman programs. The demand for younger, inexperienced workers ultimately lowers output per worker.
An opposing view by David M. Gordon (1981) is presented that blames the lower productivity in the late 1960s and 1970s not on union versus nonunion firms, but economic events such as Vietnam, high government spending, oil price shocks, and inflation. A leveling off of wage growth in construction during this time and a rising cost of living resulted in a lower standard of living for construction workers. Finkel spends the remainder of the chapter exploring several other theories on productivity and goes into great detail on the difference between union and nonunion wages and output.
One of the issues that may eventually affect productivity is competition within the construction industry. The ways in which small and large companies compete among each other are explained, as is competition among the diversely skilled employees. Often, the issue of whether these employees are union or nonunion plays a role in their skill level and employability.
What factors impact the wages these workers earn? Mainstream economic thought states that a workers wage is equal to his marginal revenue product. According to the author, the picture is more complex for the construction industry. Determination of a construction workers wage is based usually on individual skill levels, union membership status, and locality. Wage bargaining is a central issue in the construction industry. Formal bargaining is usually conducted through unions and may result in a set wage per hour for a class of workers, where lump-sum payments and piecework are discouraged. Informal wage bargaining is also conducted frequently, and is usually an individual agreement with a particular employer. The author explores several related points such as wage legislation and union threats and strikes, as well as the application of classical economic thought to wage determination.
Although unions have historically played a leading role in the direction of the construction industry, their impact over time has lessened. More firms have become known as "split shop." This is a firm that works in both union and non-union projects. Some unions seek to prohibit this practice in their collective bargaining agreements.
Unions have long played a central part in a construction workers training and eventual skill level. Apprenticeship and journeyman programs have historically been popular and allow more experienced tradesmen to impart their knowledge to new workers. With the decline of union membership, construction is evolving into an open-shop industry, with new types of training programs. They include educational programs and certification classes conducted by building associations. A main problem with the old apprenticeship system was when skilled tradesmen would become loath to impart their knowledge, time, and effort to train less-skilled workers who might displace them. Unions attempt to take the threat away by protecting the skilled tradesmans job, thus allowing a continuous flow of knowledge.
The construction industry is important to the U.S. economy. Gerald Finkels book is a good text for anyone interested in the construction industrys issues and dynamics in the labor market. Although many chapters serve as only general introductions to complex subjects, readers are provided with enough detail to increase their understanding of the industry. It is a good reference book for anyone who wishes to gain a historical perspective and know more about labor economics in the building industry.
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