Construction wages declined during the summer. Average hourly earnings in September were slightly below July and only 1.4% above last September. Construction wages increased 4.4% in 2008 and 4.7% in 2007. The summer dip should not be interpreted as the beginning of an extended period of falling wages. Brief dips in average wages often occur even in strong markets. But the summer dip does signal that construction wages are likely to grow only about 1% through next summer when all construction sectors will have been expanding for at least 3-6 months.

The drop in annual construction wage gains from close to 5% to about 1% is the consequence of the long, deep construction recession. Contractors laid off 1.7 million workers from January 2007 to September 2009. The September household employment survey reported 1.6 million unemployed people who usually work in construction. This is a 17.1% unemployment rate. Several million jobs have also been lost in the manufacturing and transportation industries that employ workers from the same pool of young and middle aged males.

The pattern of declining wages in residential construction, although exaggerated by the 70% collapse in new home construction, provides insight into the coming timing and magnitude of weaker wage gains in nonresidential building and heavy construction. New home construction wages continued to expand at a 3.9% pace through 2007, two years after the housing decline began. Then, annual wage gains fell to 1.7% in 2008 and fell further to 0.0% over the last 12 months. Residential wage gains are expected to be in the 0-1% range through next spring. This is the first year of the housing recovery.

Translating the residential trend to the other construction sectors, suggests that wage gains will continue to weaken for another year in the nonresidential building and heavy construction markets. Wages grew 4.5% in these markets in 2008. Wage gains slipped to 2.4% in heavy construction in the last 12 months and 3.0% in nonresidential building construction. A drop in wage gains to below 2% in both markets should be expected by next summer.

Then, a turnaround to rising wage gains should occur more quickly than in the residential market after the resumption of expanded jobsite activity. These sectors require more experienced and skilled workers and often a union card. This limits labor availability even in periods of high unemployment. Expect wage gains to resume rising about a year ahead but not to reach the recent 4.5-5.0% pace until 2012.

For labor cost estimates over the next nine months assume steady residential wage cost in the national market and about a 2% rise in wage rates for other construction sectors. Beyond nine months, allow for slowly but steadily rising wage gains.

As always, local construction and labor market conditions can create a different trend. Construction will recover more slowly in the Southwest and the Southeast. In union dominated markets, it will still be possible to negotiate significant temporary wage concessions for another year.