Why Construction Labor Costs Keep Climbing

Chad Holstlaw
Jan 17
4 min read

Updated: Feb 11

Associated Builders and Contractors (ABC) released a post yesterday citing challenges construction business owners are dealing with today: "High interest rates, rising labor costs and uncertainty about future materials prices due to tariffs are acting as a drag on new construction plans. Nonetheless, construction employment continues to grow." As a business owner, the thought of who might be on the verge of leaving to a competitor for higher pay could be a top concern.

After speaking with many of our clients, we still hear about the lack of skilled workers, which provoked us to think long and hard about the topic. We believe there are four reasons the labor market will continue to be challenging for construction & trades and any other adjacent industries that focus heavily on domestic productivity.

1. Trump's Tariffs

While the world today is entirely different than before Covid-19, Trump's tariffs from 2018 can still give us some insight on what may happen this time around. Tariffs, which discourage foreign production and encourage domestic production, should increase demand for productive labor, and that's exactly what happened after Trump first imposed tariffs on China in 2018. For example, here's the top issue in CliftonAllenLarson's 2018 General Building Construction Benchmark Report (and remember, this was BEFORE Covid-19):

"Many are facing an aging workforce at higher levels of management without a succession plan. In addition, companies have had to raise labor costs to attract and retain talent, as the construction industry faces labor shortages across the country. High demand for qualified labor and project managers makes it difficult to attract and retain employees."

The bad news is that on a global scale, the U.S. still consumes almost twice as much as it produces, which means there's plenty of capacity to reshore production, which will increase the demand for skilled labor.

2. Economic Focus on Production

The last time the U.S. shifted its focus heavily towards domestic production was in the aftermath of WWII. Europe and Japan were virtually destroyed, which left the U.S. to help with rebuilding efforts. Conveniently, this was also the last time we had debt-to-GDP >120%. The economic goal at the time was to let inflation run hot for a brief period (which helped debase our debt), so the Fed capped interest rates at 2.5%. Let's not forget Trump also wants lower rates.

Despite about 15 million working age soldiers returning to the workforce, the demand for domestic production pushed wages dramatically higher. Construction wages for skilled workers increased at about 9% PER YEAR from 1945 to 1950. While we certainly aren't predicting that same growth, for context in today's dollars, it would mean the cost to employ a $30/hour worker today might cost $52/hour in 2030.

3. Immigration

The Pew Research Center estimated that there were about 11 million undocumented immigrants in the U.S. as of 2022. With that figure increasing over the last two years of Joe Biden's term, some estimate the number could be closer to 20 million today. Trump's biggest objective is to close the border and deport millions of undocumented immigrants. While the latter may be challenging, it seems certain that the growth in immigration will slow precipitously.

While we don't have accurate figures for undocumented immigrants, the University of Michigan's Civil & Environmental Engineering department estimated that 1.6 million immigrants work in construction, comprising 20% of the industry's total workforce. In certain areas, that figure is much higher. For instance, they estimate that undocumented workers might make up 25% of New York City's construction workforce.

With a decrease in labor supply, along with the fact that U.S.-born workers earn $3.12 more per hour than undocumented workers (not to mention the cost of benefits), we believe this is another factor that could push wages higher over the coming years. While we finally have some sense of normalcy emerging from the new Department of Government Efficiency, which may discourage the need for $80k college degrees to work in anti-merit based jobs like DEI, it will take some time for younger workers to adapt and enter the construction and adjacent industries required for economic growth.

4. Volatility

Lastly, even though it may be unlikely to see post-WWII wage growth return, we still have a lot of uncertainty in the market as ABC noted. Business owners won't just have to price labor correctly, but they'll have to keep a tight focus on the cost of imports. There's a saying in the world of trading: "Commodities are priced at the margin." What this generally means is that during volatility, historical prices go out the window. When there are shortages, as we saw during Covid-19, price may go through the roof (even temporarily).

During major economic disruptions, price discovery is downright hard. Behavior becomes emotional. It's not simply about pricing labor (and materials) accordingly, but many resort to fear with decision making. Fortunately, prior to the election, labor market volatility was near a post-Covid low. However, due to the three factors above, we expect this trend to reverse with Trump's new economic agenda.

What this Means for Business Owners

A dynamic economic regime change will require business owners to stay poised. Some of your competitors may be unaware of these changes, while others will make emotional decisions based on FOMO (fear of missing out). The good news is that during periods of heavy economic growth, it's not just labor costs that increase, but also top-line and bottom-line growth as businesses are able to pass many of these costs onto consumers (who may benefit from lower taxes). Here are three key considerations that we can help with:

Consider advanced employee retention ideas for your skilled workers that reward them for loyalty while providing you with more control and cost recovery if they leave for an irrational competitor
Build a system to safely compound your capital to get the most on your cash, allowing you to largely offset inflation
Reduce your reliance on external financing from the volatile banking system
A dynamic economic regime change will require business owners to stay poised.