Smaller wage gains in the new residential building market appeared about a year after homebuilding peaked.  Wages were up 5.7% from a year earlier in January 2007 but only 0.6% a year later. Wages paid by residential contractors fell 0.8% in the last year including a 1.0% fall so far in 2009. A similar weakening of wages has recently begun for nonresidential building workers.  March average hourly earnings for employees of nonresidential contractors were 7.4% higher than a year earlier but already the growth pace has dipped to about 5% so far in 2009.

The huge wage gains in 2008 reflect four years of rapid expansion in labor needs by nonresidential contractors. Recent contracts have provided wage gains following the downturn in industry employment nine months ago. Some of the boom year wage gains are now being rolled back.

New York City developers and 25 trade unions agreed a few weeks ago to roll back labor costs about 15% on selected major projects so construction could resume or begin on projects too expensive for the rents expected on completion. The labor cost reductions are a combination of outright wage and benefit fund contribution reductions as well as longer workdays, fewer holidays and more efficient work and staffing rules.

The unions restricted the cuts to specific projects on a one by one application basis in an effort to keep the cuts from spreading to all work sites. This approach is understandable but probably will not work because the construction recession will be especially severe in New York City.  Similar wage cutbacks are less likely elsewhere but there will be spot cutbacks in the most troubled markets for another year. The 7.4% annual wage gain in the year ended March 2009 will slip to 2-3% over the next two years.

The wage situation is less clear in the heavy construction market.  Wages increased 4.4% over the last year but this includes a 0.7% drop early in 2009. Credit the recent wage weakness to the shortages in Highway Trust Funds, cautious cutbacks in public projects at the onset of the recession and the end of the expansion of electric generating capacity.  Wage gains will be weak but probably positive into the summer and then pick up modestly when a significant share of the stimulus funded heavy projects are begun.

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