Construction Self-Employment Rates at Record Low

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According to the 2019 American Community Survey (ACS), 22% (2.4 million) of construction workers are self-employed. This is significantly higher than an economy-wide average of 9.7% of the employed labor force. Nevertheless, construction self-employment rates are now lowest on record, down from a record high of over 26% in 2010.

One of the factors behind the recently falling construction self-employment rates is business cycle effects. The analysis of historic data reveals that self-employment rates in construction are counter-cyclical, rising during the economic downturn and falling during the expansion. This undoubtedly reflects a common practice among builders to downsize payrolls when the construction activity is down. Contrariwise, builders and trade contractors would offer better terms for employment and attract a larger share of pool of laborers to be employees rather than self-employed when work flow is steady and rising.

During the most recent housing downturn, construction self-employment increased from 24% in 2006 to more than 26% in 2010. It is likely that builders and remodelers who were no longer able to maintain a steady work flow managed costs by eliminating payroll positions and joining the ranks of the self-employed. It is also possible that some construction employees laid off during the downturn were able to stay in the industry by striking out on their own. The share of self-employed workers in construction peaked in 2010, exceeding 26%.

The opposite hiring trends emerged once the housing industry started its steady climb out of the cyclical trough. The construction industry has been adding payroll jobs since 2011 while the number of self-employed construction workers continued dwindling until 2015 and registered only modest gains since then. In 2019, construction payroll employment exceeded 8 million workers thus breaking the previous payroll record of 7.9 million set in 2006. In comparison, the number of self-employed workers in construction remained 11% below the cyclical high of 2.7 million reached in 2006. Consequently, the self-employment rates reached a record low of 22% in 2019.

Steady gains in construction payroll and accompanying anemic growth in construction self-employed help explain why builders keep reporting more extreme labor and subcontractor shortages than commonly cited numbers based only on payroll employment suggest. The fact that the current self-employment rates are record low, 2-3 percentage points lower compared to the boom years of the mid-2000s, confirms that excess demand for construction labor is even greater now.

Declining self-employment rates in construction are also consistent with the rising top builder market share. Larger home builders are more likely to work with larger subcontractors with bigger payrolls. The analysis of the Quarterly Census of Employment and Wages (QCEW) data going back to 2000 confirms that larger construction establishments had much faster rising payrolls compared to smaller establishments. As of January 2020, construction establishments with 500 or more employees had 30% more workers on their payrolls compared to January 2006, while establishments with fewer than 50 workers had not reached their peak employment levels of 2006-2007.

Additional insights into construction self-employment rates can be gained by examining a cross-state variation. Many states, where home building accounts for a higher share of the labor force, also register higher shares of self-employed. Notably, Maine, Montana, New Hampshire, Idaho and Vermont have the highest shares of self-employed construction workers in the nation and some of the highest shares of residential construction workers in the state labor force. The share of self-employed reaches 37% in Maine, 32% in Montana and New Hampshire, and over 28% in Idaho and Vermont.

The New England states are where it takes longer to build a house. Because of the short construction season and longer times to complete a project, specialty trade contractors in these states have fewer workers on their payrolls. The 2012 Economic Census data show that specialty trade contractors in Montana, Maine, Rhode Island, Vermont, Idaho, New Hampshire have the smallest payrolls in the nation with 5 to 6 workers, on average. Whereas, the national average is close to 9 workers. As a result, a greater share of work is done by independent entrepreneurs, thus explaining high self-employment shares in these states that go together with elevated shares of residential construction workers in local labor force.



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