Rising Construction Labor Costs Are Limiting Affordable Housing Supply

Labor costs are the largest line item in a multifamily development and make up between 25 to 40% of total project expenses. With new housing being more expensive to build than ever before, the cost and availability of skilled labor is undercutting our ability to create more affordable homes for our nation’s workforce.

I think we can all agree that wage growth is a good thing. But when labor costs rise to levels that impede our ability to create affordable housing for low- and middle-income households (including the folks who are building the homes) then we have a problem.

So, What Drives Labor Costs?

While labor costs vary depending on geographic location and the type of development, they are typically based on three factors:

• The existing supply of available skilled workers.
• The current demand for those workers, and
• Whether or not the project in question is subject to artificial wage mandates

In the multifamily sector, all three of these factors have combined to form a perfect storm. We do not have enough skilled workers to build the housing we need, especially in the markets where the demand for new supply is the greatest. And to make things even more difficult, the affordable housing projects that receive federal aid are often subject to a federal mandate that requires developers to pay wages that are above market.

Fortunately, there are some steps that can be taken to address these issues in both the short and long term.

1. Have You Met Davis Bacon?

For affordable housing projects that receive federal aid, developers must comply with a federal wage mandate known as Davis-Bacon. This law requires contractors to pay construction workers and mechanics the “locally prevailing wage” that corresponding work on similar projects in the area receive.

When Davis-Bacon was enacted in 1931, its purpose was to ensure that workers on federally funded construction projects were paid the same prevailing wage as workers on non-federally funded projects. To help companies comply with the Davis-Bacon mandate, the Department of Labor is tasked with annually publishing the prevailing wages that must be paid. So far so good, right?

Here is Where Things Gets Weird

The Department of Labor’s Bureau of Labor Statistics (BLS) provides the most accurate and comprehensive data on the United States labor market. It conducts large-scale, statistically representative surveys which collect data from a broad spectrum of industries and geographic regions and employs consistent sampling methods that capture data from both unionized and non-unionized workplaces. It minimizes biases and provides comprehensive and reliable information that is used for economic analysis, policy development, and workforce planning across the United States. It is the gold standard for wage data information in the United States.

But the Department of Labor does not use the BLS to set prevailing wages for its Davis-Bacon mandate. Instead, Davis-Bacon wages are set based on the findings of a different office within the DOL called the Wage and Hour Division (WHD) which collects wage data through a voluntary reporting method that is conducted less often and in limited geographic areas. Nobody outside of the people who enforce the Davis-Bacon mandate use the WHD data because the data is not even close to being as accurate as the BLS data. 1

Because the WHD data is inaccurate, it sets wage requirements that are higher than what currently exists in the private market. As a result, developers who must comply with Davis Bacon spend more on labor costs for federally subsidized affordable properties than what they would spend on similar non-subsidized properties. In California, it is estimated that Davis-Bacon adds approximately $94,000 in added costs per unit – thus increasing the total development cost by nearly 25% and reducing the overall number of affordable housing units that can be created.

A lot has changed since 1931. It is time that we changed Davis-Bacon as well by suspending the requirement that it be used for federally subsidized affordable housing projects, amending the law to ensure it uses more accurate wage data, or ending it entirely.

Now, About That Labor Shortage….

Even without a federal wage mandate, labor costs will continue to skyrocket because of a significant and persistent labor shortage across the construction industry. Since 2007, the construction trades have lost one million workers and the current labor shortage for residential construction now exceeds 500,000 workers.

2. Do Not Make The Problem Worse

According to the National Association of Homebuilders, immigrants make up approximately 25% of the current construction trade workforce. According to estimates from the Center for American Progress, nearly 1.6 million are undocumented.

These numbers tell a very simple story. When our existing workforce is already too small, the last thing we should do is make it smaller by deporting otherwise law-abiding people who we need to make housing more affordable.

Instead, we should put them on a path to citizenship.

A great place to start would be to revisit the bi-partisan immigration reform bill that was introduced in 2013 by a group of Democrat and Republican Senators that included Senators Chuck Schumer, Lindsey Graham and now Secretary of State, Marco Rubio. 2

3. Respect Blue Collar Skills

Skilled blue-collar labor is just as important to the future of our country as skilled white-collar labor. Consequently, it should be just as easy for highly skilled construction trade workers to immigrate to the United States as it is for highly skilled immigrants in other specialized fields. If someone wants to come to the United States and use their expertise to create more affordable housing, we should make it easier for them by expanding the definition of specialty occupations in the H-1B Visa program to include skilled construction labor. Our immigration policy should recognize that having the skills to install an HVAC or electrical system are more valuable to the nation’s economic security than writing code for social media platforms.

4. A Long Term Solution We Can All Agree On

While the solutions outlined above will be helpful in the short term, building a workforce large enough to create the millions of housing units we need over the longer term will not be possible if we don’t make it easier for young people to pursue careers in skilled construction trades and advanced construction technologies.

We can start by doubling down in two key areas:

Promote Careers in Skilled Trades to The Next Generation: A recent survey by the National Association of Homebuilders found that only 3 percent of young adults felt that the construction trades were a career worth pursuing. As an industry, we can change this narrative by launching nationwide campaigns to highlight the benefits of careers in construction and skilled trades, and engaging directly with schools, community centers, and local organizations to encourage more interest in construction careers.

Increase Vocational Training and Apprenticeship Programs: Just because I nearly failed high school shop class, does not mean it was not a valuable part of my educational experience.3 Not only do we need to reintroduce vocational education into our curriculums, we also have to modernize our approach to ensure that the best and brightest minds of the next generation see the opportunities that are available to them. We can do that by:

• Expanding our definition of vocational education to include advanced construction technologies, including Building Information Modeling (BIM), robotics, and 3D printing.
• Growing our available pool of skilled labor by attracting more women to work in construction and skilled trade jobs.
• Increasing funding for vocational schools and technical colleges to ensure high-quality training for aspiring workers, and
• Building more industry partnerships with high schools to establish vocational training programs, and apprenticeships that offer construction and trade certifications before graduation.

We Made It Worse. We Can Make It Better.

Because so many of the factors driving labor costs up are man-made, it is 100% within our power to un-make them. Doing so will require that we throw away the political talking points that hamstring our ability to work together and recognize that removing the artificial barriers (such as outdated wage mandates and dysfunctional immigration policies) that drive up the cost of creating more affordable housing simply makes sense.

The four solutions listed above are a great place to start. And despite the fact that they cross hot button issues like fair labor laws, immigration reform, and creating a more diverse workforce, they are not meant to be political. If our elected officials disagree or insist on making these issues political, well then maybe it is time for them to learn how to frame a window. But if they are ready to set down the talking points and pick up their legislative toolbox, then I am convinced we can get something done.