In the long run, the standard of living for people in an economy rises as the amount of output produced per hour of work–that is, productivity–rises. There’s reason for concern when productivity in an industry falls for a sustained period of time. In partiuclar, productivity seems to be falling in construction of housing, at the same time that there is widespead public concern that the price of housing is becoming less affordable to those with mid-level incomes over time.
Chen Yeh of the Richmond Fed lays out some basic fact in “Five Decades of Decline: U.S. Construction Sector Productivity” (Economic Brief 25-31, August 2025). The dark solid line shows value-added per worker in the US economy since 1948 (with the 1949 level arbitrarily set to equal 1.0). The solid green line shows value-added per worker in the construction sector alone. Notice that value added per worker in the US economy as a whole and in the construction sector more-or-less tracked each other in the 1950s and 1960s, but since then, value-added per worker in construction has actually dropped over the last half-century or so. (I’ll talk about the meaning of the dashed line in a moment.) Yeh writes:
Similarly, a 2023 working paper estimates that, if construction productivity had grown at even a modest 1 percent annually since 1970, annual aggregate labor productivity growth would have been roughly 0.18 percentage points higher. This difference would have resulted in current aggregate productivity — and likely income per capita — being about 10 percent higher than actual levels.
The lagging productivity growth in construction is not just a US phenomenon. This figure comes from a research paper published by the Australian Government Productivity Commission called “Housing construction productivity: Can we fix it?” (February 2025). As you can see, while the US construction sector is lagging overall economic productivity by the most, other countries are experiencing a gap as well.
So what’s going on here? One obvious question is whether this gap is just a statistical issue, reflecting something about the way that productivity is being measured. For example, in the “value-added per worker” graph, how confident are we that the “labor” measured here includes, say, all subcontractors including undocumented immigrants? Or as another issue, the calculation of value-added per worker requires figuring out how much of the value of, say, a house came from workers vs. other costs of building a house, like materials. If these other costs are overestimated, then the value-added per worker may be underestimated (the dashed line in the first figure above shows the potential result of using one different method of adjusting for non-worker costs over time). But as Yeh points out, studies that have looked into these measurement questions more closely continue, using a variety of alternative methods, continue to find falling productivity in construction.
A plausible explanation here is that, in many urban areas, the ability to do large-scale homebuilding on nearly empty land went away some decades ago. In addition, the rules that impose limits on land use and raise costs of construction have become more stringent. One can imagine a possibility that, even as these other factor tended to push up costs of construction, innovations in materials used or methods of building could have offset these higher costs–but that has not actually happened.
In an essay in the recently released Summer 2025 issue of the Journal of Economic Perspectives, Brian Potter and Chad Syverson” consider the relationship between “Building Costs and House Prices” using US data over a time period reaching back more than a half-century. They find that there has never been a close overall correlation when looking at city-level data between movements of building costs and housing prices. In recent decades, for example, the run-up in housing prices in urban coastal cities from California to New York has not been caused by a corresponding rise in local costs of building. But they also point out that in a number of other cities–Atlanta, Chicago, Detroit, Houston, Minneapolis, and others–the long-term rise in housing prices over the decades has actually corresponded relatively closely to the rise in local building costs.
Finding ways to encourage productivity gains in housing could come in various ways. but one overall step would be to think about ways that builders could take greater advantage of economies of scale, both in allowing and encouraging the building of larger housing projects where that is feasible, and also in allowing and encouraging the use of new technologies in homebuilding (flexible but modular housing?) that could help to bring down costs.