1971b Bpea Swan Kareken

8/13/2019 1971b Bpea Swan Kareken

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CRAIG SWANUniversityof Minnesota

a b o r n d Materialequirementso r ousing

HOUSING STARTSINCREASEDdramatically through the second quarter of1971,risingalmost60 percentover their levelin the first quarterof 1970.Privatenonfarm tarts or 1971:2wereat a seasonally djusted nnual ateof 1,961,000units,and in Augustreacheda rate of 2,235,000units, theirhighest evel in the postwarperiod.While starts rebounded hroughout1970,their continued trong ncreases hrough1971have surprisedmanyobservers.The major actors n this surgeof homebuilding avebeenthe strengthof the demand or housingandthe abundance f mortgagemoney. Highratesof household ormationand owlevelsof housingstartshaveresultedin a continuingdrop n vacancy atesoverthe lastfiveyears.The easingofinterest rates, especiallyshort-termrates during 1970 and early 1971,helpedto revive he flow of savings o commercial anks andthrift nsti-tutions.Duringthe firsthalf of 1971,householdsaccumulated epositsatthrift institutionsat a phenomenal ate, four and one-halftimes largerthan that duringthe same time perioda year earlier.Preliminarydataindicate that, on a seasonallyadjustedbasis, householdswere accumu-lating savings deposits at thrift institutionsat an annual rate of $46.2billion.Addingin time depositsat commercialbanks raisesthe accumu-lationof total savingsdeposits o $85billion.This increase n savings lowshas for the time being eliminated inancial onsiderations s a constrainton the levelof residential onstruction.Even hadthe improvedavailability f mortgagecreditbeen accurately

347


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348 BrookingsPaperson EconomicActivity,2:1971foreseen,questionswouldhave arisenabout he realresource equirementsto build2 millionunitsand about heiravailabilityo the housing ndustry.To examine he potentialbottlenecks n supply,this paper looks at thelabor and materialrequirementso buildhouses, focusingdiscussiononan additional500,000units.This figurehas severaladvantages:Starts nthe secondquarterof 1971were at a rate about 500,000higher han thosein the last two years;thus datadeveloped rom this incrementmaythrowsome light on the recentbuildup. Furthermore, he rate of. 2.5 millionunits, whichhas been used at times as a desirable arget,would mean afurther ncreaseof about 500,000units overthe level of the secondquarter.But this figure s used only as a measuring od for developingabor andmaterialrequirements nd figuresbased on it can be adjustedeasilytosome othertotal.

The HistoricalPerspectiveTherapidrise n starts romearly1970 s but one exampleof severaldra-

matic ncreases, emonstratedn Figure1. To datethe largestand sharpestbulge n thepostwarperiodwasin 1949andearly1950,whenthe raterosealmost 850,000units in five quarters.Othersharpgains occurredn 1954,1958,and 1967.WhileFigure1 shows anotherpeakin the firstquarterof1964, he ascent o it was muchmore gradualhanthe others.With the exceptionof 1958, all the sharpincreases n housingstartsbeganduringperiodsof low aggregate nemploymentnd, with the excep-tion of 1967,endedduringperiodsof highunemployment. he increasen1958was accompaniedhroughoutby highunemploymentwhile the 1967increaseoccurred uringa periodof low unemploymenthroughout.Withtheexceptionof thatin 1949-50,allthe majorexpansionsn housingstartstook place duringperiodswhennonresidentialonstructionwas stagnantif not declining.Price behaviorduringpast rapid buildupsof housingstartshas variedmarkedly.As measuredby the Boeckh construction ost indexfor resi-dential structures, he expansions n 1954 and 1958 were accomplishedwithessentially tableor decliningrelativepricesfor newhomes.As dis-cussedin more detail below, the Boeckh index tends to overstatethetrue ncrease n construction osts. Nevertheless,t declined1 percentduringthe 1954 expansionin housing starts, and continuedto do so


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350 Brookings Papers on Economic Activity, 2:1971during hequartersmmediatelyollowing ts end. This wasat a time whenoverallprices,as measuredby the implicitprivatenonfarmdeflator,roseby 1.9percent.The 1958expansionwas accompanied y a modest ncreasein the Boeckh index in excess of general nflation;however,when adjust-ment is made for the overestimate mplicit in the Boeckhindex, thereappears o have been little movement n relativepricesat that time.The 1949 and 1967 expansions were accompaniedby much largerincreases n the Boeckh index and in relativeprices.Through he periodimmediately ollowingthe 1949surge n starts,the Boeckh ndex showedan increaseof 4.0 percent n excess of changes in the private nonfarmdeflator. n 1967the excesswas4.7 percent.Thereare severalreasons for these differences n pricebehavior.Forone thing,the 1954 and 1958buildupswere the smallestof the four. Fur-thermore, hey were set againsthigh or risingunemploymentn both theeconomyas a wholeandconstruction akenby itself.Bycontrast, he 1967expansionn startscame at a timeof extremely ightlabormarkets n theaggregate nd in construction.While he 1949expansion ookplaceduringa period of rising unemploymentn general,nonresidential onstructionwas expandingmarkedly,andmostlikelyaffectedadverselyhe supplyofskilledlabor on which housebuilding ould draw.As seen below, thesupplyof manpower o residential onstructions sensitive o conditionsin the labor marketsfor both the economyas a whole and total con-struction.Slack n aggregate ndconstructionabormarketshascharacterizedhe1970-71expansion.From he firstquarter f 1970 hrough he secondquar-ter of 1971, heBoeckh ndexrose2.4percentn excessof theprivatenon-farmdeflator, lthoughallowance or the overestimaten the Boeckh ndexwould lowerthis figure omewhat.Whilemore time is needed or the fulleffecton construction osts, it does appearthat the currentbuildupinhouseswill be accompanied y an increasen theirrelativeprices, n con-trast to the experience f 1954 and 1958.This increase eflects he recentlargewagesettlementsn thebuilding radesandthehigherpricesof lumberandplywood.Thispaperconsidersn detail helabor,material, ndmortgage equire-ments forbuildinghousesandcontrasts hese requirements ithavailablesupplies.Thefigurespresented reprojections, ot unqualifiedredictions.They estimate abor and materialrequirements ssuming hat units arebuiltwithexisting echnology. f a particularnputis in inelasticsupply,


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CraigSwan 351an increasen demandwill raiseits priceand induce someone-a home-builderor someoneelse-to reduce his demandand use an appropriatesubstitute.A predictionwould attemptto take account of these effectswith appropriate emandandsupplyelasticities.Thevalueof the projec-tionspresented elow s inidentifying reaswherearge ncreasesndemandmightrun nto supplybottlenecks.

LaborRequirementsLabor requirementso build 500,000 housingunits are developedbyoccupation.The basic data come from surveysby the Bureauof LaborStatistics BLS) of on-sitemanhourrequirements er $1,000 of construc-tion cost, by occupationandtype of construction.'Extensive urveysonlaborrequirements ereconducted n the earlysixties.The BLS s currentlyengaged n updating hese surveysand new datafroma surveyof single-family construction n 1969 have just become available.Recent data formultifamily onstruction re not available. n factno surveyof apartment

construction s suchwasconducted.Consequently,aborrequirementsormultifamily tructures re based on data for college dormitory onstruc-tion. A comparison f the two surveys or single-familyonstructionndi-cates that, with appropriate llowances or changes n productivityandprices, aborrequirementserived romthe two agreequiteclosely.The use of thedataon manhour equirementsalls forjudgments boutthedistributionf unitsby type, ocation,andsize. Judgmentsmustalsobemade aboutthe increasesn laborproductivity ndconstruction osts overthe yearssince the originalsurveys.On the basisof recentexperience, 5percentof the half-milliontarts,or275,000units,areassumed o besingle-familyhouses, with theremaining 25,000units in multifamily tructures.Both single-andmultifamily nits aredistributed egionally n the basis of1969experience.2

1. Robert Ball and LarryLudwig, LaborRequirements or Constructionof Single-family Houses, MonthlyLabor Review, Vol. 94 (September 1971), pp. 12-14; U.S.Bureauof Labor Statistics,Laborand MaterialRequirementsor CollegeHousing Con-struction,BLS Bulletin 1441(1965).2. As an alternative, tartscould be distributedby type and region in proportion othe most recent advance.Sucha distributionwould make the laborrequirement iguresmore accurateas regards he recentupswing n starts.However,two factorsfavored theuse of levelsratherthan increments.First, the methodologyallows calculationof labor


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352 Brookings Papers on Economic Activity, 2:1971The construction ost of a single-family nit is assumed o be $18,500in 1970dollars,a figureslightlyabovethe actual1970averageof $18,325.The construction ost of a multifamily nit is assumed o be $12,000in1970 dollars,a bit furtherabovethe 1970figureof $11,685.These figuresassume ittleor no change n constant-dollarpendingon construction ernew unit,or in the amount of house per housingunit.A comparison fcurrent-dollaronstruction osts for privatelyowned one-unitstructuresand an adjustedconstruction ost indexfor residences evealsan actualdecline n the constant-dollarost of housingunits in the last few years.3In fact, from1969 o 1970even the current-dollaronstruction ost figure

declinedby $900 per unit. The trend in cost for multifamilyunits is notso marked.Constant-dollarosts oscillatedarounda declining rend rom1964to 1969;however, hey rose substantiallyn 1970,returningo their1964 evel.Thesedeclines n the amountof realhouse per housing unit may be areflectionof the introductionof severalnew programsdesigned o helpfamiliesof low and moderate ncome to buy or rent new housing.Sub-sidized starts have expandedrapidly n the last few years,and wereupfrom14 percentof total starts n 1969 o 30 percentn 1970.Somefurtheradvance s expected,but the buildup n all starts shouldmeana constantor slightlydeclining hare or subsidized tarts.Therecentdrop in the amountof real houseperstartcouldalsoreflectincomeand price effects.However,givenplausibleestimatesof incomeandpriceelasticities, nlya slowerrateof increase,not an actualdecline,is explainable.From 1967 to 1970 the adjustedconstructioncost indexfor residentialstructures ose 16 percentwhile the GNP consumptiondeflatorrose just over 13 percent, or an increase n the relativepriceofstructures f 2.9 percent.Duringthe sametime per capitarealdisposableincomerose 7.9 percent.Most estimatesof price and incomeelasticitiesof the demand or housingput both in the vicinityof 1 to 1.5in absolutevalue.4Thesefigurespointedto an increase n the amount of house perstartof 5 to 7.5 percent.requirementsor total privatenonfarmstarts by multiplying abor requirementsor the500,000startsby the ratio of total startsto 500,000units.Second,it is not at all obviousthatfurther ncreasesn startswill followthe mostrecentpattern; hey may well revert olonger-runpatterns.In any case, the two sets of weightings ead to verysimilarresults.3. See discussionof this constructioncost index below.4. See HenryAaron, IncomeTaxesand Housing, AmericanEconomicReview,Vol.60 (December1970),p. 799, and Frank de Leeuw, The Demandfor Housing: A Re-


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Craig Swan 353Withfigureson the size of unitsone can compute he construction ostof 500,000units in 1970 dollars. However,to use the BLS surveydataon laborrequirements,heseconstruction osts were deflated o the yearof the relevantBLSsurveyby indexesbased on the Boeckhmeasures orresidencesand apartments.These are input cost indexes,calculatedbyaveragingprices for material nputsand labor wage rates. Increases neither materialprices or wage rates will cause such an index to rise.However, ncreases n labor productivity r in the efficiencyof materialhandlingare not reflected n reductions n it. In essence these indexesassumethat labor productivityand material handlingproceduresare

stagnant.While the Boeckh indexesmake some allowance or improvedlabor efficiency,otherevidence uggests hat the allowance s inadequate.For theperiod 1962-69 heaverageannual ncrease n theBoeckh ndexfor residencess 1.8percentage oints higher han that in the CensusBu-reau'shedonicprice ndex or newhouses.Thehedonicprice ndexassumesthepriceof a house canbeestimatedby the priceof its components.To es-timatethe inflation n construction osts,a no-inflationprice s estimatedusing base year pricesbut currentyear specifications f the components.This no-inflation rice s thencomparedwith the actualcurrent earpriceto estimate he inflation n construction osts.Thisprocedures concep-tuallysuperioro aninputcost measure f inflation.From1962 o 1969 heincreasen the Boeckh ndex is at an average ateof 4.8 percentperyear,whilethe increase n the CensusBureau ndex s only 3.0 percentperyear.5Additionalevidence on the overestimate f construction osts comesfroma comparisonwiththe workof R. I. Gordon.Gordonhasconstructeda price ndexfor alltypesof structures, llowing orincreases n efficiency,whichgivesa picture or the postwarperiodmarkedlydifferentrom thatpresented y theBoeckh ndex.6From1947 o 1965 he averageannual n-view of Cross-SectionEvidence, Reviewof Economics nd Statistics,Vol. 53 (February1971), p. 10. These elasticitiesrefer to demand for a stock of houses, measuredas thevalue per unit times the numberof units. Thus a household could increase ts stock ofhouses by increasing he valuationor numberof units it owns. Data on householdsandhousingunits suggest ittle movement n the numberof unitsper household.Assumingno big boom in secondhomes, the increaseddemand or a stock of houses would expressitself in moreexpensiveunits.5. Unpublisheddata collectedby the FederalHousing Administrationalso supportthe conclusion hat the Boeckhindex overestimates he annualriseof construction ostsof single-familyhouses. See Robert J. Gordon, MeasurementBias in Price IndexesforCapitalGoods, Reviewof Incomeand Wealth,Series 17, No. 2 (June 1971),esp. sec. 5.6. Robert J. Gordon, A New View of Real Investment n Structures,1919-1966,Reviewof Economics ndStatistics,Vol. 50 (November 1968), pp. 417-28.


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354 BrookingsPapersonEconomicActivity,2:1971crease n the Boeckh ndexfor all structuress 1.6percentage ointsmorethan heincreasen theGordon ndex or thefinalpriceof structures. rom1960 o 1965 he discrepancys 1.2 percentage oints.New price ndices orresidentialtructureswerecalculated y subtracting .8 and1.6 percentagepoints romthe annualmovementof the Boeckh ndices or residences ndapartments.The productof the numberof units andthe deflatedaverage onstruc-tion costperunit is the total constant-dollarolumeof construction f the500,000units. Since these addedunits are to be built in 1971, not thesixties,some adjustmentor changes n labor productivitymust be made.The Gordondataindicate hatlabor productivityncreasedat an averagerateof 3.0 percentperyear from 1947to 1965.From 1960to 1965,how-ever,the increasewas only 1.9 percentperyear. The Gordonestimate or1960-65 agreesexactlywith the estimated ncrease n laborproductivityfromthe new BLS surveyof single-family ouse construction.7 he figuresreportedbeloware all basedon thatestimated rowth.The figureof 1.9 percentwas used to adjustall labor requirements.Changesn laborrequirementsnd n efficiencymaydiffer or specific kills.Changes n constructionechniquesor in the characteristicsf a typicalhousemay alter he occupationmix of labor.Thusgreater fficiencywouldmean that fewer bricklayers re needed to do the same workbut moreextensiveuse of brick n a typicalhouse would ncreasehe needfor brick-layers and slow the reduction n labor requirements. eparaterates ofdecline n laborrequirementsoreach skill class couldhavebeen extrapo-latedfromthetwo studieson single-familyouseconstruction. uch apro-cedurewas not followedfor severalreasons.It was not knownwhethersimilarrendsapplied o the constructionf multifamily nitsand t seemeddangerouso extrapolate n thebasisof only two observations.Relative othe 1.9percent igure, he single-familyurveydatashowa slightly asterdeclinen totalskilled aborrequirementsscomparedwithunskilledabor.Thus he estimatespresented elowmay overestimatekilled aborrequire-ments.By specificskills, labor requirementsor cementfinishers, heetmetalworkers,painters,and plumbershave declinedmost rapidly,whilelaborrequirementsor electricians nd operating ngineershavedeclinedthe least.

Tables1 and 2 presentthe estimateof 392,500requiredon-siteman-7. Ball and Ludwig, LaborRequirements, p. 13.


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CraigSwan 355Table1. On-siteLaborRequirementsorthe Constructionf 500,000HousingUnits,by Proficiency tatusand Occupationf Worker,1971Thousandsof manhours

Proficiency statusor occupation RequirementAll occupations 392.5Skilled 271.6Bricklayers 28.8Carpenters 113.9Cementfinishers 9.2Electricians 17.5Ironworkers 5.7Operatingengineers 7.1Painters 24.0Plasterers 8.9Plumbers 25.7Sheetmetalworkers 5.3Other 25.5Unskilled 120.9

Source: Author's estimates based on Table 2 and discussion in text. Figures are rounded and may notadd to totals.

hoursandtheunderlyingmanhour equirementsromwhich t wasderived.Whilethe datain Table1 are in termsof thousandsof manhours,mostrecentestimatesof hoursworkedper yearperconstructionworker uggestthat they arealso good approximationsor the numberof mennecessaryto supplythese labor requirements, ut not the number of jobs. In aspecialstudythe BLS examined he work experienceof individualcon-structionworkersfrom union health and welfarefund recordsin fourmetropolitanareas, Detroit, Omaha, Milwaukee,and SouthernCali-fornia.8As Table3 indicates,all workers n skilledoccupationsaveragedabout1,000hoursof workthroughouthe year.Otherevidencesuggests hat whilea full-timepositionin constructioninvolvesover1,800hoursof workperyear,constructionworkersaverageonly 1,000 hours of constructionwork per year. From 1960 to 1967employmentn contractconstructionimeshoursof workperweektimes8. Theadvantageof thesedatais thattheymeasure heexperienceof specificworkers.A disadvantages that they pertainonly to workthat was subjectto the collectivebar-gainingagreement;constructionworknot covered,due to type or location of work, isnot included.The qualityof the data also dependson employercomplianceand com-pleteness.Data werecollectedfor 1966and 1967and mayreflectthe generalslowdownin constructionactivityat that time.


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356 Brookings Papers on Economic Activity, 2:1971Table 2. On-site Labor Requirementsper $1,000 ConstructionCost forSingle-familyandMultifamilyHousing, by Occupationof Worker, 1960sManhours

Proficiency tatus Single-family Multifamilyor occupation housinga housingbAll occupationso 50.5 91.8Skilled 35.7 60.6Bricklayers 3.0 8.9Carpenters 18.1 16.7Cementfinishers 1.3 1.8Electricians 1.6 6.0

Ironworkers ... 3.4Operatingengineers 0.9 1.6Painters 3.8 3.6Plasterers 0.9 1.8Plumbers 2.2 9.1Sheet metal workers 0.7 1.3Other 3.2 6.4Unskilledd 14.8 31.2Sources:Single-family-Robert Ball and LarryLudwig, LaborRequirements or Constructionof Single-family Houses, MonthlyLaborReview,Vol. 94 (September1971), pp. 12,13; multifamily-Bureau of LaborStatistics,LaborandMaterialRequirementsforCollegeHousingConstruction,BLS Bulletin 1441(1965), p. 13.

Data were adjustedfor the regional distribution of starts as discussed in the text.a. 1969 data.b. 1960-61 data.c. Excludes general supervisors, professional, technical, and clerical workers.d. Unskilled are taken to be laborers, helpers and tenders, and other miscellaneous categories.

Table 3. Average Numberof Hours Workedper Year by ConstructionWorkers, by Occupation,July 1966-June 1967

Occupation Hours workedSkilleda 1,016Bricklayers 1,002Carpenters 1,014Cementmasons 903Iron workers 981Lathers 1,087Operatingengineers 1,116Plasterers 1,044Laborers 660

Source: U.S. Bureau of Labor Statistics, Seasonality and Manpower n Construction,BLS Bulletin 1642(1970), Tables A17-A20. The data are for workers in Detroit, Omaha, Milwaukee, and SouthernCalifornia.a. Includes only skilled workers listed.


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CraigSwan 357fifty weekshas averaged5.652 millionmanhours.Overthe sameperiodsocial security ecords ndicatehat anaverageof 5.566million ndividualsreportedearnings n contractconstruction,or an averageof 1,015hoursof work per person. Figuresfor individualyears show only small varia-tion, witha range of 997 to 1,026hours per personreporting arnings ncontract onstruction.On this basis,the estimated equirementf 392,500manhours an be translatednto 220,000 ull-time obs.Any change n theutilizationof existingmanpower hroughan increase n the numberofhoursworkedper yearwouldmeana corresponding rop n the numberofmenneeded o supply he requirednumberof manhours.This gain couldbe quite largeif the existing abor force, not just additionalworkers,ex-perienced ncreasedhours of work.How will this heighteneddemand or labor be met? Special eaturesofthe residentialconstruction abor market, combinedwith current abormarket onditions,mayhelphomebuilderso meetpossibleaborshortageswhile building 500,000 units.9Homebuilders ave traditionally tood atthe end of the manpower ine. The supply of labor to construction squite sensitive o aggregate abor market conditionsand the supplyofskilled abor to homebuilderss sensitive o the availability f other con-structionwork.Someof these issues are illuminated y the followingstatistical esults

CLF= -0.11 + 1.01 CE+ 2.58AU,(0.057) (0.200)RI = 0.942, standarderror of estimate= 0.740.Figuresin parenthesesarethe standarderrorsof the estimatedcoefficients.whereCLF= annual percentagechange in the contractconstruction aborforce, 1949-70CE = annualpercentagehange n contractconstruction mployment,1949-70AU = annualchange n the civilian labor force unemployment ate.

Aggregateunemployment ates have a strong impact on the size of the9. The descriptionof the residentialconstruction abor market that follows draws

heavily on J. T. Dunlop and D. Q. Mills, Manpower n Construction:A Profileof theIndustryand Projections o 1975, n TheReportof the President'sCommittee n UrbanHousing:Technical tudies,Vol. 2 (1968), pp. 239-86a.


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358 Brookings Papers on Economic Activity, 2:1971construction abor force, as indicatedby the large coefficienton the AUvariable.There appearsto be a large group of men with constructionskills and with high mobility who move in and out of construction nresponse to job opportunitieselsewhere.As labor markets in generaltighten, these previouslyunemployed onstructionworkers ind work inother ndustries;as labor markets oosen, the ease of entry nto construc-tion (workforcesare beingcontinually ormedas old projectsare finishedand new ones started)results in an increase n unemployment n con-struction.The coefficientvery close to unity on the CE variablerevealsthat the increases n constructionemployment hat have occurredhaveattractedabor nto the sectoralmostman for man. This is anotherndica-tion of the wide dispersion f construction killsand the mobilityof theseworkers. Once these directly induced movements of labor have beenaccounted or, there is a furthersubstantial low of manpower nto andout of construction n responseto changes in other job opportunities.These people presumably ave construction kills and would acceptcon-struction obs.Theavailability f skilled aborto residential onstructions quitesensi-tive to labormarketconditions n constructionas a whole. For severalreasons-less favorablewagesand fringebenefits, horterdurationof jobs,and others-homebuildershave oftenbeen forced o acceptpoorlytrainedworkmen r to findandtrainnewworkmen.But theyhave adapted o theirunfavorable osition n the manpowerine in a way that, given he currentlabor market ituation n both the whole economyand construction, ug-gests hatthe residential onstructionwork orcecouldbe expanded apidlyand without oo muchtrouble.

Responding o theirshortagesof skilledworkersand theirneedto trainnew workers,homebuilders ave developeda dual labor force in whichacrew of highly skilledworkers-keymen-is used to supervise obs whiletransitoryworkmenare hired and trained as needed.Dunlop and Millssuggest hatthe task of traininga man to do non-keyman's workon a homebuilding iteisnot necessarily ong and difficult.Homebuilders ften assert heir ability o traina good carpenteror machineryoperatorwithin a few months. Such training susually nformal,consistingof on-the-job nstructionby a moreskilledmechanicandwork experience. n periodsof labor shortage n construction omebuildershire and trainmany persons.10

10. Dunlop andMills, Manpower n Construction, p. 245.


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CraigSwan 359Homebuildersre able to engage n suchhiringandtrainingbecause heirwork sites are often unorganizedor poorly policed by union businessagents.Unionizationn constructionas a wholehas beenput at between60 and 70 percent. ndustryobservers stimate hatfor single-familyon-structionunionizations perhapsone-half hat in total construction.Theability of a homebuilder o retainhis keymenis dependentupon labormarketconditions n constructionas a whole. Whenconstructionabormarketsare tight, keymen are attracted o othertypes of constructionwithhigherpay andlongerprojects.

Becauseof their adjustment o past labor market conditions, home-buildersarecurrentlyn a quitefavorablemanpowerposition. Aggregateunemployment nd unemploymentn constructionhave both increasedmarkedlyromtheir ow levels n 1969.Theseasonally djustedunemploy-ment ratefor privatewage and salaryworkersreporting onstructionasthe industryof their astjob averaged10.7percent orthe first six monthsof 1971,as contrastedwith a rate of 6 percent or the year 1969. On aseasonallyadjustedbasis, employmentn contractconstruction uring hefirsthalf of 1971was 3,246,000,a drop of 190,000 romemploymentn1969.11Data from the householdsurvey,covering ndividualswithout regardto where they work, showed 375,000 unemployedcarpentersand con-struction raftsmenn January1971.This was an increaseof 194,000overthe samefigurefor 1969.By July 1971 the numberof unemployed ar-pentersand craftsmenhad declined o 181,000,still an excess of 122,000overthe comparableigure or 1969.The numberof unemployedonstruc-tion laborers olloweda similar rend,withan excessover 1969of 118,000in Januaryand34,000 n July.In anattempt o assess he availability f skilledmanpower, stimatesoftotal manhoursn construction, y skills, were derived or 1969 and 1970in a manneranalogous o that usedto obtain he manpower stimates or500,000housingunits; that is, figureson real constructionactivityand

11. Contractconstructionrefersto privateestablishmentsperformingconstructionactivity-new, maintenance nd repair SIC 15-17). It excludesgovernment genciesen-gagedin constructionactivity, operativebuilders,and forceaccount workers.Operativebuildersare those primarily engaged in constructionon their own account for saleratherthan as contractors. n 1967operativebuildershad 72,305employees,comparedwith 3,341,452for contract construction.Force account construction s performedbyan establishmentprimarily ngaged n some other business,withits own employeesandfor its own use.


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360 Brookings Papers on Economic Activity, 2:1971on-site aborrequirementswere usedto estimatemanhours n total con-struction orselected kills.12Table4 compares hedecline nmanhoursnconstructionbetween 1969 and 1970with the manhourrequirements f500,000housingunits for selectedoccupations.With some exceptions,primarily ricklayers,arpenters,ndpainters, hereappears o havebeenaroughbalancebetween he amountsof manpower eleased rom hedeclinein constructionactivityfrom 1969to 1970 and the amountsneeded for500,000housingunits.Sincehomebuildingn fact expanded y 500,000unitsbetween1970and1971, the manpower equirementsf this recent ncreasehavejust aboutoffset the manpower resourcesreleasedduring the decline in overallconstructionactivity between 1969 and 1970. If employment n non-residential onstructionhadbeenunchanged etween1970and 1971,onewouldexpect otal construction mploymentn 1971to haverecovered oits 1969 level. However,employment n contractconstructionn 1971 isbelow the 1969 evel by almost200,000,reflecting he continuedweaknessof nonresidential onstruction.Real nonresidentialonstructionactivityhas declined,althoughdollarexpendituresaveincreased.Current-dollarexpenditures or nonresidential onstruction n June 1971 were, at aseasonally djusted ate,5.4 percent bove heirvalue or1970; he Boeckhindex of theconstructionost of nonresidentialtructures ose8.9 percentin the sameinterval.Afteradjustmentor the overestimaten the Boeckhindex, thesefigures uggesta decline n real activityof about2.0 percent.This drop in real nonresidential ctivity, reinforcedpresumablyby in-creasingproductivity, as lowered otalemploymentn contractconstruc-tion despite heresurgence f homebuilding.Givenmid-1971 evels of realnonresidential ctivity, he increase n total construction mploymentby220,000required oranadditional 00,000housingstartswouldraise otalconstructionemploymentmerely to 1969 levels. The weaknessof theoverall abormarketwouldmakesuch anexpansionquitefeasible.The estimatesn TableI of manpower equired, yskills,are on a highlyaggregative asisand do notguaranteehat theregionaldistribution f un-employed manpowermatches he regional ncreases n housingactivity.Advances n starts for the secondquarterof 1971(seasonallyadjusted),as contrastedwithstarts n 1970,ranged rom 12.7percent n theNorth-east to 48.4percentnthe West.Starts n the North Central egionwereup

12. See Dunlop and Mills, Manpower n Construction, pp. 264-71, for a discus-sion of a similarcalculation.


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Craig Swan 361Table4. Decline n Manhoursn Construction,969to 1970,andManhourRequirementsor 500,000HousingUnits, by SelectedSkillsThousands

ManhourDecline in requirementsmanhours, for 500,000Occupation 1969 to 1970 housingunitsBricklayers 22.6 28.8Carpenters 79.1 113.9Cementfinishers 6.7 9.2Electricians 18.3 17.5Ironworkers 5.6 5.7Operatingengineers 10.5 7.1Painters 15.7 24.0Plumbers 24.0 25.7Unskilled 107.8 120.9

Source: Author's estimates. See text for method.

36.4 percent ndthose n the South38.1percent.To assesspossible egionallabor shortages equiresdata on total construction ctivityby region,butthe only such data availablereport constructionactivityauthorized npermit-issuing laces.Table 5 lists the changes n the value of permit-authorized onstructionromJanuary-May f 1969 o January-May 971.While hesefiguresdo not includepublicnonresidentialonstruction,heysuggest hat constructionmanpower an be expected o be available n theNortheast,North Central,and Westernregionsof the country,and, de-pendingonthe geographicalmobilityof workers,may be in relatively hortsupply nthe South.Taken ogether hese igures uggest hatmanpowers currently vailablefor sustaining he level of housingstartsat 2 millionunits and for facilitat-ing a furtherexpansion.Shouldnonresidential onstructionor aggregateactivityadvance ubstantially,he supplyof manpowero residential on-struction ouldbeput in jeopardy.In a recent ssueof BrookingsPapers, CharlesBischoffpresented rojec-tions of expendituresn nonresidentialtructures.13he consensusprojec-tion, averagingivealternativemodels of investmentbehavior, uggestsadepressedevel of privatenonresidential onstruction ctivity hrough hefirsthalf of 1973; n that period,expenditures f $21.1billion(1958prices)

13. Charles W. Bischoff, Business Investment in the 1970s: A Comparison ofModels (1:1971), pp. 13-63.


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362 Brookings Papers on Economic Activity, 2:1971Table5. PercentageChangen the Current-dollaralueof ConstructionAuthorizedn Permit-issuinglaces in theUnitedStates, by Region,January-May 969 to January-May 971

PercentagechangebetweenJanuary-May1969 andJanuary-May1971Region Residentiala Nonresidentialb

Northeast 6.7 -15.5North Central 10.9 -0.8South 32.6 14.7West 37.4 -1.8Source: ConstructionReview, Vol. 17 (May 1971, July 1971), Tables C-3, C-6.a. Private and public housekeeping residential construction.b. Total private nonresidential construction.

are still belowthose in the last half of 1970and well belowtheir peak of$24.6billion n the thirdquarter f 1969.EvenmoreoptimisticorecastsofGNP growthdo notreversehe pictureof prolongeddepressed ctivity.So longasaggregate nemploymentemainshigh,thesupplyof labortoconstructionn generalwillbe ample.If commercialonstruction emainsat depressedevels, he supplyof skilledmanpower o homebuilders illbeeasyandthey willhaveno trouble n holding heirkeymen.If,however,he neweconomicprogram nnounced yPresidentNixoninAugust 1971hasanimmediateargestimulative ffecton employment,hesupplyof manpower o residentialonstruction ouldbeadversely ffected.A dropmuchbelow5 percentn the aggregate nemploymentatenot onlywould makeit difficult o hirelabor to build2.5 millionunits,but mightalsolead to shortages imply n maintaining 2 millionunitrate.

MaterialRequirementsTo whatextentwouldthepressuresmplicit n buildingan increment f500,000housingunitsforceup the pricesof constructionmaterials?Howwouldthis affect hesellingpricesof houses?The 1963 nput-outputtructure f theAmerican conomywasusedto

identify ndustries hatsold largeproportions f theiroutput o residentialconstruction.The constructionof 500,000housingunitsgivesriseto de-mand for additionalmaterialsnot only by the constructionndustrybutalsoby industrieshatsupplyt.To analyze hese otalrequirements,ndus-


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Craig Swan 363trieswererankedby the ratio of totalrequirementsf residential onstruc-tion to theirtotal output.Table6 liststheindustriesn whichmore han 5percentof totaloutput sattributableo the requirements f residential onstruction. rom the firstcolumn, which revealsthe dependency f particular ndustrieson home-building,t is seen to be a primarymarket orlumberandwood,stoneandclay, and fabricatedmetalproducts primarilymetalsanitaryware,plumb-ing fittingsandbrassgoods, heating quipment, ndmetaldoors,sash,andtrim).From the second column, ndicating he dependenceof residentialconstruction n these ndustries,umber ndwood, stoneandclay,andfab-ricatedmetalproductsagainappear o be most important, ccounting orover43 percentof material nputs.Whateffectwouldbuilding500,000morehousingunitshaveonthepriceand quantityof these material nputs?To answer his questiondata arepresented nrecentpriceandquantity ehavior f selectedmaterials.Lum-ber and plywood are treatedseparately n the next section.)Figure 2 de-picts output and price indexesfor selectedmaterial nputs from 1965 to1970.All priceshave been deflatedby the wholesaleprice ndexfor indus-Table6. Relationof Selected ndustrieso ResidentialConstruction,963

RatioofRatioof directmaterialindustry utput requirementsattributableo to totalresidential materialconstruction requirementsto total of residentialIndustry output constructionForestryand fisheryproducts 14.6 ...Iron and ferroalloyores mining 6.5 ...Nonferrousmetal ores mining 7.3 ...Stone and clay mining and quarrying 19.8 0.5Lumberand wood products,exceptcontainers 40.5 16.5Householdfurniture 8.4 2.0Paintsand alliedproducts 11.2 1.0Stone and clay products 31.3 15.3Primary ron and steel manufacturing 6.5 2.9Primarynonferrousmetalsmanufacturing 9.8 2.3Heating, plumbing, and fabricated structuralmetal

products 22.8 11.7Otherfabricatedmetalproducts 9.1 2.5Electric ightingand wiringequipment 12.7 2.1Sources: Derived from U.S. Office of Business Economics, Input-OutputStructure of the U.S. Economy:1963 (1969), Vols. 1, 2, 3.


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364 Brookings Papers on Economic Activity, 2:1971Figure 2. Output and Relative Prices of Selected BuildingMaterials,1965-70Index 1967=100135 Plumbing ixtures130 -125 - Outp120-115110105- Relative prices100 - - -

95110

Portland ement1051001125 Heatingequipment120 -115110 _105

95 -105

95 Iron andsteelI95 I I . I I1965 1966 1967 1968 1969 1970


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CraigSwan 365Figure2. (continued)Index 1967=100130

Gypsum125Ouitputw120-

11511010510095 Relative prices '90 .

11015 Paint105

10095

120Clay products115-

110 _105 -100951965 1966 1967 1968 1969 1970

Source: Construction Review, selected issues, Tables E-2 and P-1. Relative prices are calculated by divid-ing the wholesale price index for the material by the wholesale price index for all industrial commodities.These calculations use the group index, except for iron and steel, whose inidex was taken as the simple aver-age of structural shapes, reinforcing bars, galvanized sheets, nails, hardware, and steel for buildings.


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366 BrookingsPaperson EconomicActivity,2:1971trialcommodities.The relativeprice of plumbing ixtureshas risenslowlyovertimewith ittle relation o changes n output; f anything, t rosefasterin yearswhen output fell. Therelativeprice of paint has followedmove-ments n outputsince 1968.Therelativepriceof iron andsteelproductsellslowly hrough1968andhas risensince hen n the face of declining utput.Cementprices were essentially table from 1966through 1968 and haverisensincethen. Relativepricesof othermaterials, eatingequipment, ndclayproducts avebeenessentially onstant, ven n thefaceof largechangesin output.The relativepriceof gypsumgoods s fallingevenas output s ris-ing; this pricedecline s concentratedn the priceof wallboard,whichhasdropped ubstantiallyince 1968.Due to the normal ags in construction, he surge in housing starts n1967carriedover into homebuilding onstructionn 1968as well. The at-tendant ubstantialncreases n outputof materialnputs,which ncreasedan averageof 10.8 percent,areshown in Figure2. Only for plumbing ix-tures,gypsum,and paintwerepriceadvances n excessof general nflationand the increase n the relativepriceof gypsumwas only0.1 percent.Mostmaterials ppear o be available n quiteelasticsupplies.

Thepricebehaviorof materials n earlierperiodsof rapidexpansionnhomebuilding lso supports he conclusionof generally lasticsupplies. n1959,with large ncreases n the outputof materials apart rom ironandsteel,output ncreases veraged ver 14 percent), he onlyadvances n rela-tive priceswere n plumbing ixturesand clay products.Relativepricesofall the othermaterialsdeclined.Experiencen 1963wasa bit more mixed,withrelativepricesof plumbingixtures, lay products, nd gypsum isingThe argest ncreasewasfor clayproducts ndwasonly0.7percentage oint.In summary, f one can extrapolate rom the record,Figure2 suggeststhat,abstractingrom price ncreasesdue to generalnflation, he priceofplumbing ixtures an be expected o rise modestly; hose of cementandiron andsteelmay ncrease lightlymore;andthat ofpaintwillrisewiththeincrease n residentialonstructionxpenditures. thermaterials, owever,appear o be available n fairlyelasticsupply.

Lumber ndPlywoodRequirementsLumberandplywoodrequirementsor building500,000housingunitsweredevelopednmuch hesamewayaslaborrequirements.With heavail-


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CraigSwan 367Table7. Lumber ndPlywoodRequiredorHousingConstruction,968

Per Per $1,000 ofhousing constructionMaterial unit costLumber board feet)Single-family 12,900 696Multifamily 4,685 449Plywood square eet)Single-family 4,450 240Multifamily 2,005 205

Source: Author's estimates derived from data in Rising Costs of Housing:LumberPrice Increases, Hear-ings before the House Committee on Banking and Currency,91 Cong. 1 sess. (1969).

able datafor 1968on the amountof lumberand plywoodused by size andtype of dwellingunit, calculationsweremadeof the amountof thesemate-rialsper unit and perthousanddollarsof constructionost (see Table7).To use these iguress to assume hat the amountof lumberandplywoodembodiedneachdollarof dwelling nitwillremain t its 1968 evel.Greatlyaugmented emand,however, ould raisepricesand inducesome substitu-tionaway rom umberandplywood o otherbuildingmaterials.But,asin-dicatedearlier, hesefiguresare intendedas projections,not predictions.Recent igures nlumberandplywooduseappearo beinline with onger-runtrends.Considerednrelation o eachthousanddollarsof constructioncost,lumberhasshown ittleconsistentmovement ver he sixties.Plywoodhas followeda rising rend,althoughobservers eel that much of its poten-tial substitution or otherbuildingmaterialshas been accomplished ndonlymore imitedareasof substitution emain.14Given the lumberandplywoodrequirementser unit and the assump-tions, aid outabove,about he size andtypeof housing, otalrequirementsfor 500,000housingunits are 4.3 billion boardfeet of lumberand 1.6bil-lion square eetof plywood.It is not surprisinghat these numbers epre-sentmajor ncreasesn outputof both materials, or residential onstruc-tion is a majormarket or both. From 1962to 1967 t accounted or anestimated37 percentof total lumberconsumption nd probablya similarproportion f plywoodconsumption.15 he lumber o build 500,000more

14. Dwight Hair and Alice H. Ulrich, The Demandand Price Situation or ForestProducts,1970-71, U.S. Departmentof Agriculture,ForestService,MiscellaneousPubli-cationNo' 1165(March 1970), p. 30.15. First AnnualReporton NationalHousingGoals, H. Doc. 91-63, 91 Cong. 1 sess.(1969), p. 40.


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368 BrookingsPaperson EconomicActivity,2:1971housingunitsrepresents 1 percentof 1970 umberconsumption;or ply-wood, the correspondingigure s 9 percent.

LUMBER PRICESFrom 1961to 1970lumberconsumptionand prices(deflatedby thewholesaleprice index for industrialcommodities) ncreased n step (seeTable8).Consumptionxpanded 7 percentandrelativeprices ose 12per-cent. Duringthe winterof 1968-69,lumberprices rose dramatically, s

housing tartsadvancedhrough1968,reaching n annual ate of 1,705,000units n January1969.Theresulting tepped-up emand orlumber,alongwith expectations f continuedhighlevels of starts,coincidedwith somespecialproblems estrictinghe supplyof logs: adverseweather,a boxcarshortage,and somelabor shortages.The consequencewas a sharprise inprice.During1969and1970,as housingactivitydeclinedandthespecial upplyproblemswere eliminated, umberpricesfell. The declinebegan in April1969andamountedo 26 percentn the nexttwelvemonths.Onecontributingactorwasaction aken n early1969by the Nixon ad-ministrationo increase he supplyof lumberand help lower prices.OnMarch19, PresidentNixon ordered n increasen the timbercut on publiclands-1.1 billionboard eet over he next fifteenmonths-and announceda cutbackof DefenseDepartment urchases.Restrictions n the exportofTable 8. Consumptionand Relative Prices of Lumber, 1961-70

Consumptiona RelativepricebYear (billionsof boardeet) (1967=100)1961 35.522 92.21962 37.313 93.91963 39.173 96.31964 40.842 97.61965 40.963 97.51966 40.695 101.61967 39.150 100.01968 42.038 114.41969 43.048 124.11970 41.432 103.4Sources: U.S. Office of BusinessEconomics, 1969BusinessStatistics, pp. 43, 46, 149,and Surveyof CurrentBusiness,Vol. 51 (June 1971), pp. S-8, -9, -31.a. Domestic production plus net imports.b. Wholesale price index of lumber divided by wholesale price index of all industrial commodities.


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CraigSwan 369logs from public ands were also imposed.While the administration'sc-tions could not have had much of an immediate mpacton actual umbersupplies, heirmereannouncementmay haveserved o discouragepecula-tion aboutcontinued hortages, nd thus to lowerprices.Evenmore mportant, he drop in lumberpricesreflected he decline nhomebuilding ctivity.The behaviorof savings lows and housingstarts nearly1969musthavedeflated xpectations fcontinuedhigh evelsof hous-ing activity.According o the lumberrequirements evelopedabove,theactualdecline n housingconstruction etweenApril1969andApril1970impliesa dropin the demand or lumberof 2 billionboardfeet.Thedownwardmovement f lumberpriceswasreversed ythesharpup-turn nhousing tartsduring1970andthe subsequent urge nconstructionexpenditures. rom ts low point n June1970 o June1971,outlayson newunits increased58 percent o an annualrate of $31.5 billion. This higherrate s consistentwith an increased emand or lumberof almost4.5 billionboard feet and has been accompanied y an increaseof relative umberpricesof just over 18 percent.The NationalAssociationof Home Builders stimates hat lumberand

wood productsaccount or about 20 percentof the construction ostof asingle-family ouse.A 15 percent ncrease n the prices of these compo-nentswouldmean an increase n total construction osts of 3 to 4 percent.Theeffecton the sellingprice of a house would presumably e less-per-haps 2.5 to 3.5 percent.Certain osts, such as architecturalees and othercommissions,would increase as a markup over constructioncost, butothers, uch as land prices,need not rise n response o lumberprices.PLYWOOD PRICESProduction f softwoodplywood n 1970wasmore hanfive imes hat n1950,rising rom2.676billionsquare eet to 13.900billion square eet (seeTable9). The relativeprice of plywood has fallenoff continuously ince1950except oryearsof larger-than-averagencreasesn output-years as-sociatedwithhigh evelsof housing tarts.From 1950 o 1960plywoodout-put nearly ripledwhilerelativepricesdroppedmore han 35 percent.Since1960a doublingof outputhas been accompanied y a decline n relativepricesof 13 percent.Theexperiencef the last few years uggests hatthe periodof expandingoutputand declining ricesmay well be over.Whileoutputrose 12 percent


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CraigSwan 371sawtimber f 2 trillionboard eet on January , 1968, his ratiowouldmeana sustainedyield of 60 billion to 100 billion board feet. These figuresonprospective ieldsare substantially bove current ates of harvesting ndwouldrequiremore ntensivemanagement f timberands f theyareto berealizedon a sustainedbasis.Management ftimber andsrefers o activities uchas cullingdead rees,pruningandthinning, reatmentof disease,seedingand reforesting ftercutting,and themaintenance f accessroads.Moreintensivemanagementpermits igher atesof growthandthus higher evelsofharvestingwhile heexisting nventory s maintained.But it requires he inputof realresources,whichwillnecessitate igherprices.Tables10 and 11 show the distribution f commercial orest land andsawtimbernventoriesand cut by ownership.Forests cover 762 millionacresout of a totalland area n the UnitedStatesof 2.3billionacres.Of thetotal, 235 millionacresare classified s unproductive ecauseof low yield;16 million acresare reserved or park and wildernessareas and are notavailable orharvesting.Privateholdingsare harvestedmost intensively,witha cut-to-inventoryratio in 1962of 3.3 percent.Privateholdingsweresupplying 3 percentofTable 10. CommercialForest Land and Sawtimber Inventories n theUnited States, by Ownership,January 1, 1968

National Other Forest OtherTypeofforest forest public industry private TotalCommercialforestandPercentage distribution 19 9 13 59 100Acres (millions) 97 45 65 303 510Softwood awtimberPercentage distribution 53 12 16 19 100Board feet (billions) 1,064 233 325 381 2,003HardwoodawtimberPercentage distribution 8 8 14 70 100Board feet (billions) 37 38 70 342 487Total sawtimberPercentage distribution 44 11 16 29 100Board feet (billions) 1,101 271 395 723 2,490

Source: Effectof LumberPrices andShortageson the Nation's Housing Goals,Report of the Subcommitteeon Housing and Urban Affairs of the Senate Committee on Bankingand Currency,S. Doc. 91-27, 91 Cong.1 sess. (1969), p. 33.


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372 Brookings Papers on Economic Activity, 2:1971Table 11. Cutof Sawtimberon CommercialForestLandin theUnitedStates,by Ownership,1962

National Other Forest OthlerTypeof sawtimber forest public industry private TotalSoftwoodPercentage 28 9 35 28 100Boardfeet (billions) 10.3 3.4 12.7 10.3 36.7HardwoodPercentage 3 3 17 75 100Boardfeet (billions) 0.4 0.4 2.0 8.8 11.7TotalPercentage 22 8 30 39 100Boardfeet (billions) 10.8 3.8 14.7 19.1 48.4

Source: U.S. Department of Agriculture, Forest Service, TimberTrends n the UnitedStates, Forest Re-source Report 17 (1965), p. 179.

thesoftwoodcut while holdingonly34 percentof the softwood nventory.Softwoodinventoriesare largelyconcentratedon national forest land,which s beingharvestedeast intensively.16n 1962softwoodtimberhar-veston allnational orest and was only 0.9percentof theinventory f saw-timber,as contrastedwith a harvestrate of 3.7 percenton forest ndustryland. Indirectevidence uggests hat the yield on national orest and hasrisen to about1.2percentof inventory,whilethe yieldon forest ndustryland has remainedat about 3.7 percent. f the formercould be raisedtomatch helatter,an additional 6billionboard eet peryearwouldbe forth-coming.Whilesuch an increase s problematic t best, the ForestServicehasstated hat under n acceleratedmanagementrogram hat s wellbal-anced in all respects,we couldincrease imber harvestson the NationalForestsover7 billionboard eet in the nextdecade. 17 he majorproblemleading he Forest Service o restrict he harveston its land is inadequatefinancing orreforestation,imber tand mprovement, ndotherelementsof intensivemanagement.n 1961 he President roposeda ten-yeardevel-opmentplan for national orests; n 1970timberstandimprovement ndreforestation orkwerebudgeted t29.5 percentof thelevel proposednine

16. Private owners hold almost 60 percent of commercialforest land but only 29percent of sawtimber nventories.These lands could be stocked more intensivelywithtimber,but this is a long-run,not a short-run, olution.17. NationalTimber upplyAct,Hearingbeforethe Subcommittee n Soil Conserva-and Forestry,Senate Committeeon Agricultureand Forestry,91 Cong. 1 sess. (1969),p. 16.


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CraigSwan 373yearsearlier.18 heForestServicehasa backlogof 4.8millionacres nneedof reforestationnd 13millionacres n needof timber tand mprovement.ForestService stimatesndicate hese andscouldyield5 billionboard eetof timberannually.Whilethereare largedifferences etweenestimatesbythe ForestService ndothersabouthowmuchof an increasentimberhar-vesting anbe expectedromthe national orests, t doesappear hat a sub-stantial ncreasen timbercuttingcould be achievedwithout eopardizingthe multiple-userinciple f the national orests.There s, however, ome disputeover how soon increasedharvesting fnational orestland could begin.Forestindustry pokesmenbelievethataccelerated uttingcould beginimmediately.The Forest Service s morecautiousand has indicated ts unwillingnesso accelerate uttingbeforecontinuingevelsof financing reassured nd ntensivemanagementeginsto producehigheryields.It is interestingo note that whileprojectedwork-loadfactors or the ForestService or timber tand mprovementnd treeplantingand seedingrose 51 percentin the 1971 federalbudget, theydropped22 percent n the 1972budget.

THE PRICE EFFECTSWhat mpactwouldthebuildingof 500,000morehousingunitshaveonlumberandplywoodprices?Experiencerom he earlyandmiddle ixties sinappropriateor evaluatinghe immediate ffecton pricesof a largein-crease n demand.The expansionof lumberconsumptionn that periodwas over evelsof output hathad beenattained n thefifties; umbercon-sumption n 1964-66was at the samelevelas in 1955and 1956. But thelevelsattainedn 1968and 1969werehigher hananyothers nthepostwarperiod. tmaywellbe that umber onsumption asreached pointatwhichthe short-run upplycurve s quiteinelastic.The recentrise in startshasbeen accompanied y largeincreasesn the relativepricesof lumberandplywood.An additionalump n startsby 500,000unitswouldbe expectedto affect umberandplywoodprices mmediatelyndsharply, aising hemby 15to 20percent.However, heyshouldmoderate omewhat ssuppliersrespond o themwith increased mports,more intensivemanagement fexisting ands,andharvesting n newlands,all of which aketime to have

an impacton supply.18. Effectof LumberPricesandShortageson the Nation's HousingGoals,Report ofthe Subcommittee n Housingand UrbanAffairsof the SenateCommitteeon Bankingand Currency,S. Doc. 91-27,91 Cong. I sess. (1969),p.'80.


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374 Brookings Papers on Economic Activity, 2:1971

MortgageRequirementsMortgagerequirementsor 500,000housingunitsweredeveloped romthe initialassumptions boutunitsizeandtype,along withadditionalas-sumptionsabout nflation, ite cost, andloan-to-value atio.To convert o1971pricesconstruction ostsoriginally iven n 1970prices, t is assumedthattheyarerisingby 5.5percentovertheyear.Duringthe firsthalf of 1971, headjustedBoeckh ndex of constructioncostsrose atanannual ate of 7.6 percent.However, everal actors uggestthat this rate of increasewill be moderated n the second half of theyear.Higherunemploymentndtheworkingsof theconstructionndustrystabilization oardwouldbe expected o reducewage settlements.Moreimportantly,he President'swage-pricereezeandsubsequent ecisions anbe expectedo moderatencreasesn constructionosts.Additionalelementsof the sellingprice-land and othercosts-are as-sumed o be 25 percentof construction ostsfor single-family nits and9percentof construction ostsformultifamily nits.For single-family nits

this ratio mpliesa meansellingpriceof $24,432n 1970,which sjustabovethe CensusBureau igureof $23,400 or mediansalesprice.The loan-to-valueratiois assumed o be 72 percent ormultifamilymortgagesand79percent orsingle-familymortgages.These igures reconsistentwithrecentexperience nd wereusedin projections ssociatedwith the Housing andUrbanDevelopmentAct of 1968.19Theseadjustments,ogetherwith the earlierassumptions boutthe sizeand numberof units, implygrossmortgagerequirements f $6.9 billion.Thisfigureoverstateshenecessary et increasenmortgages.Thebuildingof 500,000moreunitswillallowthe removalof someadditionalunitsfromthe housingstockthat wouldotherwisehavebeenfinancedand will thusreduce he netmortgage equirements.

SAVINGS FLOWSA netincreasen mortgages f $6.9billionwouldrepresent 36 percentincreasen homeandmultifamilymortgageendingover the 1970 evelof19. SeeHousingand UrbanDevelopment egislation f 1968, HearingsbeforetheSub-committee on Housing and Urban Affairsof the Senate Committeeon Banking andCurrency,90 Cong. 2 sess. (1968),Pt. 2, pp. 1372-73.


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Craig Swan 375$19.3billion.Thisis a large ncreasebut not impossible o achieve.Prelim-inarydataforthe firsthalf of 1971placemortgageendingatanannual ateof $28.6billion.Theflow of savings o mutual avingsbanksandto savingsand loan associations uring he firsthalfof this year can only be charac-terizedas phenomenal.According o preliminary ata, savingsdepositsatmutual avingsbankswere ncreasingt a seasonally djusted ateof almost$12billionduring he firsthalf of thisyear,comparedwith $4.4billion n1970. Savingsharesand Home LoanBank advancesat savingsandloanassociations ose at a seasonallyadjusted ateof $26.7 billion for the firsthalf of this year, far greater han the 1970 increaseof $12.4 billion. Theinflowof time depositsat commercial anks was also at higherrates, butthe changewas not as dramaticas those of the thrift nstitutions.Whatwillthesesavings lowsmean n termsof mortgage ending?Table12 suggests n answer. treports he resultsof multiplyinghe excessof sav-ingsinflowsduring he firsthalf of 1971over theirratesfor 1970by mar-ginal portfoliopercentages.These figuresrepresent he ratio of increasedmortgages o increased avingsor time depositsover the period 1965-70.The tablesuggests hat theincrementn savings lowswill meanadditionalmortgage endingof over $18 billion. The figures n Table 12 implicitlyassumethat savingsflows in the secondhalf of the year will remainatthe levelsobservedduring he firsthalf.Thisassumptionmayseema bitimplausible, speciallywith respectto savingsflows to the thrift institu-Table12. Relation f SavingsFlowsto MortgageAcquisitions f SavingsInstitutions, 970-71Dollar amounts n billions

PotentialSavings nflows Marginal increase nmortgage mortgageTypeof institution 1970 1971J Increment ratiob acquisitionsCommercialbankso $36.7 $43.9 $ 7.2 0.157 $ 1.13Life insurancecompaniesd 7.1 10.3 3.2 0.142 0.45Mutual savingsbanks 4.4 11.9 7.5 0.510 3.83Savingsandloanassociationse 12.4 26.7 14.3 0.900 12.87

Sources: Cols. 1 and 2-Board of Governors of the Federal Reserve System, Division of Research andStatistics, Flow of Funds, Seasonally Adjusted, 2nd Quarter, 1971, Preliminary (August 6, 1971; pro-cessed); col. 4-Flow of Funds Accounts: Financial Assets and Liabilities Outstanding,1959-1970 (May 4,1971; processed).a. Seasonally adjustedannual rate for the first half of the year.b. Ratio of increased mortgages to increased savings or time deposits over the 1965-70 period.c. Total time deposits, including large negotiable certificates of deposit.d. Financial assets minus policy loans.e. Savings shares plus advances from the Federal Home Loan Banks.


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376 Brookings Papers on Economic Activity, 2:1971tions. Some appear o have arisenas partof an adjustment f portfoliosaway fromgovernmentecurities.Consequently,igures n Table 12 wererecalculated n the assumptionhat all flow variablesduring he secondhalf of the yearwillbe at one-halfheir evelduring hefirsthalf of the year.The figuresmplyan incrementn mortgageendingof $8.6 billion,still inexcessof the $6.9 billionrequirements.Thesefigures ndicate ittle problem n financing he most recent ncre-ment nstarts.Furthermore,ther actorsmayease hefinancing f an addi-tional 500,000housingunits.A decline n long-termnterestrates shouldhelp maintainsavingsflows to the thrift nstitutionsas well as affect theportfolio llocations f institutionswithasset lexibility-commercial anks,life insurance ompanies, ndmutual avingsbanks.There s good reason obelieve hat the actual 1970 evel of mortgageendingwas lowerthanthatwhichactuallycould have beenattainedout of 1970 savings lows.Theseflowswereup sharplyovertheirrates n 1969.The normal agin thealloca-tion of fundsto mortgagesmeans hat to some extent1970mortgageend-ing reflected avings lows n 1969,not thehigher evelsof 1970.For com-mercialbanksandthe thrift nstitutions,he ratioof mortgageending odepositinflowsfor 1970is belowthe correspondingigure or the whole1965-70period.If mortgage endingby commercial anks s particularlysensitive o time depositsotherthan large certificates f deposit,thereiseven moreroom for optimism, or these depositshaveriseneven morein1971 hanhave totaltime deposits.

GOVERNMENT ASSISTANCE

The federalgovernment as been fostering he establishment f severalmortgagemarket nnovations,whosefurtherprogressduring1971 couldfacilitate he financing f a high evel of housing tarts.The innovationsn-cludethe pass-throughmortgagesecuritydevelopedby the GovernmentNationalMortgageAssociation GNMA)to tap the resources f pensionfunds,and the secondarymarket n conventionalmortgagesbeing orga-nizedbythe FederalHomeLoanBankBoard,whichhas budgeted cquisi-tionsat $1 billionfor 1971.InAugust 1971PresidentNixon authorized nadditional 2 billion or GNMAto use in purchasing HA andVA mort-gages.Finally,continued igh evelsofmortgage cquisitions ytheFederalNationalMortgageAssociationwill help to ease the financingof a highlevel of housingstarts.


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CraigSwan 377In summary, urrent ighratesof savings nflowsappearmorethanade-

quateto meet the $6.9 billion mortgagerequirementsf 500,000housingunits.Givena decline n long-termnterest atesandcontinued ederal up-port of mortgagemarkets, unds appear o be availableo financea furtherincrease n housing tarts.

SummaryndConclusions

There houldbe littletrouble romthe supply ide n sustaining level of2 millionhousing tarts n the immediate uture.Moreover, here s reasonforoptimismaboutthenation'sability o buildanother arge ncrement fhouses.Recenthigh ratesof savings lows to commercial anksand thriftinstitutions avereleased inancial onstraints nhomebuildingor the cur-rentperiod. f sustained,heseflows,supplementedy aggressive ctionbythe federalgovernment, ould financea furthersubstantial ncrease nhomebuilding.Laborandmost materials ppearat the moment o be readilyavailableto homebuilders. he current xpansionn homebuilding as occurred t atime of high aggregate nemployment, hichworks o increase he supplyof laborto constructionn general, nda time of reduced evelsof nonresi-dentialconstruction,whichaugments he supplyof laborto homebuilding.In the aggregate he requirementsor skilledworkersn homebuilding p-pearto be matchedby reductions n other forms of construction. houldtherebe a marked ncrease n eithernonresidentialonstruction r in gen-eral economicactivity, he availabilityof labor to homebuildingwill becurtailed.Thesuppliesof mostbuildingmaterialsappear o be quite elastic;theyexpandedn 1968as well as in earlierhousingbooms with relatively mallmovementsn relativeprices.Lumberand plywoodare the major excep-tions: As demand or themmovesup with the increase n homebuilding,theirpriceswillrisesubstantially.


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Comments ndDiscussion

JohnKareken:CraigSwanhasgivenus a veryplausible ndoptimistic s-sessmentof the nation'sability to build500,000more housesa year, or2,500,000 n total. If anything, would say theassessmentmay be a shadetoo optimistic.For one thing, housinghas alreadyrisengreatly rom its1970averageandpresumably as absorbeda lot of laborin the process.The laborrequirementsreatedby the next additionof 500,000units tohousing tartsmay not bemet quiteaseasilyas wassuggestednthe paper.Another actor hat maynot be so favorable s the availability f mort-gagemoney.The flow of funds nto thethrift nstitutionsnthe firsthalf of1971wassuper-phenomenal;wanhas cut this flowin half in makinghisprojection f funds.While t looksprudent,he assumed utbackmaynotbe largeenough.Therecentheavy lowof funds nto thethrift nstitutionsreflected ot just a stockadjustment, ut also-at least according o somepeople-fears about the economy.If the new economicpolicy alleviatesthose fears, that incentivefor the accumulationof liquid funds willdisappear.Thehistorical nalysis evealeda striking ontrastbetween he 1949andthe1967 ncreasesnhousing tarts,bothof whichcaused harp ncreasesncostsandrelativeprices,and the 1954and1958 ncreases, eitherof whichhad thateffect.The 1949and 1967 ncreaseswere arger,but other actorsseem mportant.The ease of the 1954and1958advancesmay suggest hatweshouldnot concernourselvesoo muchwithsmoothinghousebuilding.Theremustbe some gainsfrom smoothoutput,but if the sameamountof

378


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CraigSwan 379housingcan be obtainedover sometime interval, t maynot be a badideato buildthe houseswhen nonresidential onstructions weak. In a roughway thatis what ourratherqueer inancial rrangementsaveso farguar-anteed.The evidencehatSwanhas provided uggests hatwe maynot havegreatcause o worryaboutsmoothing he production f housing.

GeneralDiscussionNancyTeetersreported hatwork she had done to evaluate hereason-ablenessof the nationalhousinggoalsrevealedhat the underlying emandforhousing sverystrong.Shiftingdemographicactors,primarilyhelargeincreasen the relativenumberof youngpeopleenteringhe labor force nthe marriageable ges, is responsibleor this demand.The demand romthis sourcewill remainstrongfor at least five years. Moreover,as theseyoung peoplestarthavingchildren,demandwill shiftbacktowardsingle-familyhomes, f past patternsprevail,and theremay be someretreat romthe relativelyhighdemand or multifamily nits thatprevailedn the late

1960s.She felt that the strongunderlying emand or housingposeda policydilemma.Swan'spaper upportsheinformal bservationhat stronghous-ingdemands usually atisfiedonlywhenbusiness ixed nvestments rela-tivelyweak.If the investmentax credit is againreinstated,he resultingincrease n business ixedinvestments likelyto squeezeresidential on-struction.Given the demandoutlookfor housingand the unsatisfactoryconditionof muchof the existinghousingstock,reinstatement f the in-vestmentax creditmaybe a verypoor policychoice,sheconcluded.CharlesBischoffpointedout thattherewereseveralways nwhich he in-vestment ax creditmight ndirectly ffectresidential onstruction.He re-portedevidence hattheinvestmentax credit ends o shiftbusiness apitalspending owardequipmentand awayfromnonresidentialonstruction,other hingsbeingequal.To thisextent f the realcompetitionor resourcescomes from withinthe constructionndustry, he investment ax creditshouldnot hurthousing.Another mportantquestionhas to do withthe flowof funds.If the in-vestment ax credit stimulatesbusinesscapitalspendingmorethandollarfordollar, twill tendto tightenong-term reditmarkets.Clearly, loosen-ingof fundswouldoccur n theshortrun,sincethetaxcreditwouldbegin


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380 BrookingsPaperson EconomicActivity,2:1971immediately; ut its impactwouldhavea substantialag. In the longerrun,the situationwouldbe reversed, ccording o neoclassical quations hat in-dicate hat investments stimulatedmorethan dollar or dollarover a two-orthree-year orizon,andthe supplyof fundsfor housingwouldsufferanadverse ffect.Therewas some inconclusivediscussionof whetherparticularly trongcompetition or resources ook place betweenmachinery nd equipmentindustries n the onehand,andhousingon the other.JohnKareken tressedthathighways ndotherpublicworksaswell asbusiness onstruction om-petedwith homebuilding.ArthurOkunreported he view of senioradviserAlan Greenspan,whowasunable o attend he conference, hat labor supplies or homebuildingwere extremely ensitive o the general tate of labor markets.He wouldemphasize his more strongly han competitionwith nonresidential on-struction.While2.5millionhomesmightbe built in today's abor market,it might be difficult o keep building2 millionhouses if the aggregateunemploymentatebeganto approach4 percent.Okunfelt that Swan'spaper lluminated he supplyconsiderationshatpermitted, ndcontributedo, the extremevariability f the industry.Fewfactorsseemspecific o homebuilding.The labor force is highly mobile.Withtheexceptionof lumber, he materials sedby homebuilding re alsoused widely elsewhere.Unlike manufacturing, o well-defined apacitylimitations set by plantandequipment tocks.WilliamPoole notedthatbigshifts nthenumberof peopleemployednconstruction ccurwithoutmuch mpacton relativewagerates,suggestinga high elasticity n the supplyof labor.This observationmplied hat thepriceelasticityof demandmustbe highalso. If the price elasticityof de-mandwere ow, presumably ctivityandemploymentwouldremainmorestableandwageswouldrise or fall to the extentnecessaryo maintain herequiredaborin homeconstruction.ThomasJusternoted, however, hatthe largedownward wingsof activity n thepastseemto reflect hortagesof financial esources ather han of laborormaterials.Juster eportedhisgeneral mpressionhatsingle-familyouseconstruc-tion and certaintypes of commercialbuildinghad experienceda verymarked hiftawayfrom on-siteconstructiono in-factoryproduction.Ofcourse, he rapid ncreasen mobilehomescanbe regardedhatway,butthetrendextends arbeyond hem.Thisnewkind of factory-built ousingprobablyhassubstantial roductivity ainsandflexibility.ts existence ur-


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CraigSwan 381therreduces he dangerof laborsupplyshortages or on-sitebuilding.Atthe sametime that workersare needed o fill conventionalobs in housingconstruction, hey mightbe in the process of beingreleased rom otherkinds of construction ctivitiesbecauseof increased ndustrializedabrica-tion. AlthoughJusternotedthe lack of dataonthe growthandrelativem-portanceof in-factory ctivity,hisgeneral mpressionwas that it was grow-ing rapidly,mainlybecauseof priceadvantages ndthe absenceof certaintypesof restrictiveaborpracticeshat affecton-siteconstruction.Craig Swansaid that recentsurveyswould soon make availablemoreinformation n the relative mportance f factory-made ousing.The pre-liminarydatasupport he impression f a marked hifttowardprefabrica-tion.The on-siteoccupationalmixhas shifted owardunskilled abor, im-plying increaseduse of prefabricated arts.WarrenSmithbelieved hat theprospect ora new investment ax creditwas onepartof a general hifttowardan expansionaryiscalpolicy, nclud-ingother ax cuts of apermanent ature.When he economy ecovers,hesecutswillrequiremonetary olicyto betighter han t otherwisewouldhavebeen. Indirectly, urrentpolicydecisionsmaybe generating situation nwhich it will becomevery difficult o financehousingin a prosperouseconomy.ThomasJuster elt that, evenundersuch circumstances, ousingcouldcompete or fundsbetter han it had in the past. Up through1966-67, hesupplyof funds o housingwas constrained y the6 percentusury awsinmost states.Many of these usury aws were iberalized ubsequently. orthefirst ime nyears,a legitimatelyreemarket or funds s available o thehousingmarket. n thatrespect,mortgageborrowings nowmorecloselyakinto Treasury ebtandbusinessborrowing.Unliketheirsituationnthepast,mortgageborrowers an compete or funds,payingwhatever atesarerequired.

1971b Bpea Swan Kareken

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