3 Major Factors Limiting American Construction Productivity

A recent Goldman Sachs report explores why the U.S. construction industry has underproduced compared to other countries’ construction industries.

Between 1970 and 2024, productivity in the U.S. construction industry fell 30% while overall labor productivity more than doubled.

Three primary factors have led to this stagnancy.

1. Limited gains in industry innovation in recent decades

Most of the tools and machinery commonly used by the construction industry were already invented in the 1950s, and technological changes have been incremental. Construction has also benefitted little from rapid advances in information and communication, with a few exceptions such as drones, 3D printing and artificial intelligence (AI), which continues to evolve. Goldman Sachs estimates technological changes have boosted annual construction productivity growth by 0.8 process performance (pp) since 1965, below the 1 – 1.3pp boost it estimates for other industries.

2. Greater regulatory constraints

Increased regulation of housing has also been a drag on the industry’s productivity growth. Data reveal land use regulations have gradually become more rigid across major advanced economies over the last 50 years, with regulations in the U.S. tightening the most. The report’s analysis shows regulatory changes lowered annual construction productivity growth by 0.7pp, offsetting boosts from technology and labor quality improvements.

In more recent decades, land use regulation changes explain most of the difference in construction productivity growth between the U.S. and similar industrialized countries. The report estimates that a 1% increase in country-level regulation intensity lowers construction productivity growth by 0.9pp when taking into account productivity factors such as investment intensity, labor quality, and other country-specific characteristics.

In the U.S., the report identified the following as notable contributors to decreases in productivity: 

• Approval delays 
• Design restrictions
• Impact fees
• Political involvement

Stringent regulations also contribute to the nation’s housing affordability crisis as they prevent builders from increasing the housing supply. In a recent congressional testimony, NAHB chairman Buddy Hughes noted, “The time and costs associated with complying with a multitude of government regulations can be significant for small- and medium-sized builders and ultimately limit housing supply.”

3.  Mismeasurement in real construction output 

Productivity measurement issues, such as the U.S. construction output price index, have also been a likely factor. The index uses a top-down approach, which relies on the final sales price and characteristics such as home size, numbers of bedrooms and bathrooms, and types of heating/air conditioning and exterior wall material to tabulate price changes, without taking into account improvements in system efficiencies and material quality over the past few decades.

A recent academic study found properly accounting for quality improvement and several other measurement problems would raise measured annual construction productivity growth between 1990 and 2024 from the currently reported -1.0% to -0.3%. These measurement issues are likely less pronounced for similar countries that account for quality improvements using a more thorough bottom-up approach. 

Overall, the report shows that the tightening of U.S. land use regulations has accounted for 40% of the gap in productivity growth between construction and the rest of the economy since 1965, and the lack of innovation and quality mismeasurement have each accounted for 20%.