The Strangest Number in Economics

Here's a fact that should bother anyone involved in development. Since 1970, productivity across the U.S. economy has more than doubled. Manufacturing. Logistics. Information technology. Agriculture. Nearly every major industry has figured out how to produce more with less.

Construction went the other direction.

Construction labor productivity has declined by more than 30 percent since 1970. The average construction worker today produces less output than a construction worker fifty years ago. Federal Reserve Bank of Richmond research published in 2025 confirmed what practitioners have observed for decades: the construction industry has experienced one of the most unusual and persistent productivity declines of any major sector.

I've watched this play out across thirty years of development work. Projects take longer than they should. Costs escalate faster than inflation. Trade coordination gets more complex, not simpler. And the physical capacity to build at scale is constrained in ways that make housing production nearly impossible to accelerate through conventional means.

Understanding why construction productivity has declined is essential for anyone who cares about housing supply, development economics, or the long-term viability of the built environment industry.

Building Prototypes Instead of Products

The fundamental problem is structural. Construction operates on a project-by-project basis. Every building involves a unique site, a unique design, and a unique team of contractors and subcontractors assembled for that specific project.

Manufacturing solved productivity decades ago by standardizing products, centralizing production, and automating repetitive tasks. A car factory builds the same product thousands of times, refining the process with each iteration. A construction project builds a one-off prototype, disperses the team, and starts over on the next project with different people, different conditions, and different problems.

This project-based production model makes productivity improvement extraordinarily difficult. There's no factory to optimize. There's no assembly line to automate. Every project is a custom job, and the learning from one project rarely transfers efficiently to the next.

Regulation Made Projects Smaller and Firms Smaller

Research from NBER suggests that increasing regulatory complexity since the 1970s has contributed to the productivity decline in a specific way: stricter land-use regulation tends to produce smaller projects and smaller construction firms, both of which are generally less productive.

Larger projects create opportunities for standardization, repetitive installation, and economies of scale. Smaller projects don't. When zoning reduces allowable density and permitting adds complexity, the average project shrinks. Smaller firms with less capital and less technology handle these smaller projects. The result is an industry that has fragmented into thousands of small, relatively unproductive operations rather than consolidating into larger, more efficient platforms.

I explore how zoning specifically constrains the development opportunity set in Zoning and Land Use: The Systemic Gatekeeper of Scalable Housing. The regulatory and productivity problems are deeply interconnected.

Technology Adoption Has Been Slow

Every other major industry has been transformed by technology. Construction hasn't. Not at scale.

Prefabrication, modular construction, robotics, digital twins, BIM coordination, automated layout: all of these technologies exist. Some of them have been around for decades. But their adoption in mainstream construction remains limited.

There are real reasons for this. The project-based nature of construction makes it harder to justify capital investment in technology that might only apply to one building type or one market. The fragmented subcontractor model means that innovation has to be adopted across dozens of independent companies for any single project, not just by one manufacturer. And the regulatory environment in most jurisdictions was designed around conventional construction methods, creating friction for alternative approaches.

But the result is clear. Construction has not experienced the kind of technology-driven productivity transformation that reshaped manufacturing, logistics, and agriculture. And until it does, housing costs will continue to rise faster than incomes, and housing supply will continue to fall short of demand.

What This Means for Housing

The housing implications are direct. If builders require more labor hours to produce each unit of housing, the number of homes that can be built in a given timeframe declines. Even when zoning allows development and capital is available, limited construction productivity can prevent housing supply from expanding quickly enough to meet demand.

This is one of the reasons I frame the housing shortage as a systems failure rather than a zoning problem or a capital problem. You can fix the zoning and fix the capital and still not build enough housing if the physical capacity to construct isn't there.

Construction productivity is the binding constraint. It determines the ceiling on how much housing can be built regardless of how much demand exists or how much capital is available.

Evolve Development Group examines this constraint at the platform level in Why Construction Productivity Matters.

What This Means for Development Economics

For developers, declining productivity shows up as cost and schedule pressure. Every percentage point of productivity decline translates into higher labor costs per unit of output. Higher labor costs mean higher total construction costs. Higher construction costs require either higher rents to justify the investment or higher capital commitment with lower returns.

The compounding is significant. If construction takes 20 percent longer than historical norms because productivity has declined, that's 20 percent more carry cost on the development loan. Twenty percent more general conditions. Twenty percent more insurance exposure. On a leveraged deal, that additional time directly compresses investor returns.

I explore how time functions as the dominant risk variable in development in Long-Duration Real Estate Capital Durability and Mass Timber and Duration Risk in Long-Cycle Development. Construction productivity decline makes the duration problem worse for every project.

The Path Forward

Reversing the construction productivity decline requires changes across multiple dimensions simultaneously. Technology adoption needs to accelerate, which requires both capital investment and regulatory accommodation. Project delivery models need to evolve from fragmented subcontractor structures toward more integrated, repeatable systems. Industrialized construction, including prefabrication, panelization, and modular assembly, needs to move from niche applications to mainstream practice. And the regulatory framework needs to evolve to accommodate building systems that don't fit neatly into codes designed around stick-frame and concrete construction.

I explore what this path looks like in practice in Construction Productivity: Unlocking the Physical Ability to Build at Scale.

The developers and builders who solve construction productivity will define the next generation of the industry. Everyone else will keep building prototypes, one at a time, the same way we've been doing it for fifty years. And the housing shortage will persist.

Related Research

TysonDirksen.com

Evolve Development Group

Frequently Asked Questions

Why has construction productivity declined since 1970? Several structural factors: fragmented project-based production that prevents standardization, increasing regulatory complexity that shrinks average project and firm size, and slow technology adoption relative to other industries. Unlike manufacturing, construction builds one-off prototypes rather than repeatable products, making productivity improvement structurally difficult.

How is construction productivity measured? Typically as output per worker or output per labor hour within the industry. By this measure, construction productivity has declined 30 to 40 percent since 1970, depending on methodology, while the broader economy has more than doubled.

Why is construction less productive than manufacturing? Manufacturing benefits from centralized facilities, standardized products, and automation. Construction projects are site-specific, design-specific, and assembled by fragmented teams of subcontractors. This structure limits opportunities for the standardization and repetition that drive manufacturing productivity.

How does declining construction productivity affect housing? Lower productivity means more labor and time are required per housing unit, which increases costs and slows production. Even in markets where zoning allows development and capital is available, construction productivity limits how much housing can actually be built.

Can construction productivity be improved? Yes, but it requires systemic change: industrialized construction methods like prefabrication and modular assembly, more integrated project delivery models, accelerated technology adoption, and regulatory frameworks that accommodate alternative building systems. Incremental improvements to conventional methods are unlikely to reverse a fifty-year decline.