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Building and construction: economic gains from workplace reforms.



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THE HON TONY ABBOTT MP

MINISTER FOR EMPLOYMENT AND WORKPLACE RELATIONS

Media Release

01903

Building And Construction : Economic Gains From Workplace Reforms

Reform of workplace practices in the building and construction sector has the potential to produce significant economic gains according to research released by the Minister for Employment and Workplace Relations today.

Econtech, assisted by Ernst and Young, found significant cost differences between commercial building and domestic residential building.

The consultants found that the same building tasks such as laying a concrete slab, building a brick wall, painting and carpentry work cost on average 10 percent more for commercial buildings than for domestic residential housing. The report found that:

❍ The higher construction costs for commercial buildings are primarily due to lower labour productivity,

although higher hourly rates of pay are also a factor. ❍ Labour productivity in commercial building is reduced by restrictive work practices such as imposed

manning levels, inclement weather provisions, demarcation disputes, and stoppages and other disruptions. ❍ Labour productivity in the construction of commercial buildings is also lower than in residential

housing construction because payment is according to hours worked, rather than according to work done, reducing the incentive to increase productivity.

The research also identifies Victoria and Western Australia as having the highest construction costs of all States.

'These are two States where there is a need for significant workplace reform,' Mr Abbott said.

The consultants estimated that if labour productivity in the building and construction sector could be lifted to the standards of domestic house building, the CPI would be one per cent lower, real gross domestic product 1.1 percent higher and there would be a gain in economic welfare of $2.3 billion.

If labour productivity is improved by a further 10 percent, to partly close the gap with international best practice, the researchers estimate these economic gains almost double.

'A reformed construction industry, with good workplace practices, can add significantly to Australia’s economic growth and the well being of all Australians.'

An overview of the main findings of the report is attached. A copy of the full report is available in the News section at www.workplace.gov.au.

For further information contact:

Simone Holzapfel 0417 656 668

17/03/2003

Main Findings of Econtech Report

The Consultants found that the Australian economy could gain significantly if workplace practices in the construction sector could match standards in domestic house building.

• The Consumer Price Index (CPI) would be 1 per cent lower, there would be an annual gain in economic welfare of $2.3 billion and real gross domestic product would be 1.1 per cent higher.

• Further rises in labour productivity of 10 per cent, to partly close the international productivity gap of 50 per cent with North America, would see these economic gains nearly double.

The construction industry would gain through a reduction in its costs and an increase in construction activity. Australia would get a long tem lift in business investment. The mining and transportation sectors, in particular, would benefit.

The consultants found significant cost differences between commercial building and domestic residential housing.

“The same standard building tasks-such as laying a concrete slab, building a brick wall, painting and carpentry work-cost an average of 10 per cent more for commercial buildings than for domestic residential housing. Labour cost differences are of the order of 19 per cent. These cost disadvantages are before allowing for the additional costs of site allowances that are paid on many commercial building projects, which can add significantly to the cost of labour and therefore to overall project costs.” The consultants estimate that site allowances can add 3-4 per cent to the overall costs of building a large project in Victoria.

The cost per square metre of rendering a wall was over 40 per cent higher in commercial construction than in house building while the cost of constructing plasterboard walls was over 25 per cent greater.

The Consultants also found building and construction costs varied by State, with costs higher in Victoria and Western Australia.

“The cost disadvantage(of commercial building tasks over domestic house building) is above 10 per cent in Victoria and Western Australia, where restrictive work practices in commercial building are generally acknowledged to be more pervasive.”

Cost differences in Western Australia were more than 25 per cent higher than in Victoria, and about double the cost differences in South Australia and Queensland. Cost differences s in Victoria were over 20 per cent higher than in NSW and over 50 per cent higher than in South

Australia and Queensland. Costings were based upon the Rawlinsons Australian Construction Handbook, a leading authority on construction costs in Australia.

Western Australia and Victoria also consistently recorded the highest levels of industrial disputes in the industry over the five year period 1997-2001.

A copy of the Report Overview is attached.

Economic Analysis of the Building and Construction Sector - Report by Econtech Pty Ltd (with assistance from Ernst & Young) February 2003

Report Overview

In December 2002, the Department of Employment and Workplace Relations commissioned Econtech, with the assistance of Ernst & Young, to undertake a study of the potential economic effects of workplace reform in the building and construction industry. This report outlines our approach to the study and presents its key conclusions, which are summarised below. In brief, our approach to the study involved estimating: É the scope for improving the productivity of the building and construction industry through

workplace reform initiatives; and É the economic impact of those improvements in productivity.

Scope for increasing productivity through workplace reforms The results of our study suggest that there is significant scope to increase productivity in the building and construction sector of the economy through initiatives such as workplace reforms. In particular, as outlined below, our analysis suggests that: É bringing workplace practices in the construction of commercial buildings into line with

those applying in domestic residential building has the potential to increase labour productivity in the construction of commercial buildings by around 13 per cent, which would reduce construction costs for commercial buildings by about 6 per cent; É similar workplace reforms in the engineering construction sector could increase labour

productivity by around 6.5 per cent and reduce engineering construction costs by around 3 per cent; and É bringing workplace practices more into line with international best practice has the potential to improve productivity even further.

Our analysis of Rawlinson’s authoritative data on construction costs reveals that costs are significantly higher for the construction of commercial buildings than for domestic residential buildings. The same standard building tasks - such as laying a concrete slab, building a brick wall, painting and carpentry work - cost an average of 10 per cent more for commercial buildings than domestic residential housing. Labour cost differences are of the order of 19 per cent. This raises the costs of commercial buildings such as larger multi-unit dwellings, office blocks and warehouses. Note, these cost disadvantages are before allowing for the additional costs of site allowances that are paid on many commercial building projects, which can add significantly to the cost of labour and to overall project costs.

The cost disadvantage for commercial building tasks of 10 per cent is a national average and varies from state-to-state. The cost disadvantage is above 10 per cent in Victoria and Western Australia, where restrictive work practices in commercial building are generally acknowledged to be more pervasive, and below 10 per cent in New South Wales, Queensland and South Australia.

The higher construction costs for commercial buildings are primarily due to lower labour productivity, although higher hourly rates of pay are also a factor. Labour productivity in commercial building is reduced by restrictive work practices such as imposed manning levels, inclement weather provisions, demarcation disputes, and stoppages and other disruptions. Labour productivity in the construction of commercial buildings is also lower than in residential housing construction because payment is according to hours worked, rather than according to work done, reducing the incentive to increase productivity.

This suggests that if work practices in the construction of commercial buildings were to be reformed so they were more in line with those applying in the construction of domestic residential building, labour productivity in the construction of commercial buildings could increase by around 13 per cent. This would reduce commercial building costs by about 6 per cent.

Similar workplace reforms in the engineering construction sector of the economy also have the potential to reduce the costs of constructing roads and bridges, communications and electricity infrastructure. Since restrictive work practices are less prevalent in the engineering construction sector than they are in the construction of commercial buildings, we would not expect the magnitude of the potential cost savings from workplace reform to be as great. However, reductions of the order of 3 per cent would seem achievable.

Even if labour productivity in the construction of commercial buildings were increased up to the levels applying in the construction of domestic residential building, productivity in Australia’s construction industry would still lag well behind international best practice. Data appearing in Discussion Paper 15 of the Cole Royal Commission shows that labour productivity in the construction industry is currently about 50 per cent higher in North America than Australia. This large international productivity gap suggests that it should be possible to raise labour productivity in the Australian construction industry even further by bringing Australia’s workplace practices in the building and construction sector more into line with international best practice.

Economic impact of improving productivity in the building and construction industry Econtech has used its highly detailed MM600+ model of the Australian economy to model the long-term economic impact of two scenarios: É Scenario 1, which involves:

æ increasing labour productivity in the construction of commercial buildings by 13 per cent so that it is consistent with labour productivity in domestic residential building; and æ increasing labour productivity in the engineering construction sector by 6.5 per cent;

and

• Scenario 2, which involves increasing labour productivity in the non-residential construction sector of the economy by a further 10 per cent, closing part of the international productivity gap.

The key broad long-term economic effects under both scenarios are shown in Table 1.

Table 1 Summary of Economy-Wide Effects Scenario 1 Scenario 2 Consumer Price Index (CPI) -1.0% -1.6%

Real Consumption 0.6% 1.1%

Annual Economic Welfare Gain ($billion) 2.3 4.2

GDP 1.1% 2.0%

GNP 0.7% 1.4%

Note: The above results refer to permanent effects on the levels, not growth rates, of indicators. For example, Scenario 1 shows a gain of 1.1% in the level of GDP, not in its annual growth rate.

The model results suggest that the improvements in labour productivity outlined in Scenario 1 would lower construction costs, thereby reducing business costs across the economy, as all industries are significant users of commercial building or engineering construction. Lower business costs would mean lower consumer prices. As shown in Table 1, the Consumer Price Index would be an estimated 1.0 per cent lower than under current construction industry work practices. As also shown in Table 1, consumers would be better off by $2.3 billion on an annual basis, in this first scenario where the domestic productivity gap between house building and other construction is closed.

The construction industry would benefit considerably under this reform scenario. Higher productivity in the construction industry lowers its costs, leading to lower prices for new constructions. This stimulates demand for new constructions leading to a significant permanent gain in construction activity of 2.2 per cent. This includes a gain of 1.5 per cent for residential construction and 2.5 per cent for non-residential construction.

Higher productivity boosts activity throughout non-residential construction. The long-term gains range from 1.6 per cent for roads and bridges to 2.5 per cent for other engineering and 3.2 per cent for non-residential building, where the productivity gain is largest. This gain in non-

residential construction underpins a long-term lift in business investment of 2.2 per cent.

Econtech has also assessed the likely timeframe over which these long-term gains would develop. It has done this by simulating a similar gain in labour productivity in the construction industry using its dynamic quarterly model known as MM2. Both MM600+ and MM2 broadly agree on the size of the long-term gains. The results from MM2 indicate that these long-term gains are likely to take about five years to develop fully.

At the same time, there would be some shifting of jobs away from construction and towards other industries. Higher labour productivity reduces labour demand in construction and this effect is only partly offset by an increase in labour demand from higher construction activity. Overall, employment in construction would be down 4 per cent: the employment fall in residential construction is estimated at 2.2 per cent, while larger productivity gains lead to an employment fall in non-residential construction of 5.2 per cent. The fall in employment in construction is fully offset by increases in employment in other industries. The temporary adjustment costs of this job shifting from construction to other industries would be spread over a

period of about five years. It needs to occur to achieve a more efficient allocation of labour between industries, underpinning the permanent gains to consumers from construction industry workplace reform. The modelling assumes that the number of people employed in Australia is fixed in the long-term. While the modelling results show no change in the overall level of

employment, this is conservative. In fact, reform of workplace relations has the potential to permanently reduce unemployment and raise employment.

Under Scenario 2, Econtech simulated the effects of not only closing the domestic productivity gap, but also raising Australian non-residential construction industry productivity by a further 10 per cent, closing part of the international productivity gap. Econtech’s modelling shows that the economy-wide benefits almost double under this more ambitious reform scenario. The Consumer Price Index is lowered by a further 0.6 per cent, taking the total CPI reduction from workplace reform in the construction industry to 1.6 per cent. There would also be an additional gain in consumer welfare measured on an annual basis of $1.9 billion, taking the total gain to $4.2 billion.

Even this second scenario would still leave a large productivity gap with North America. However, caution is needed about the scope for closing this remaining international productivity gap. There are measurement uncertainties in international comparisons of productivity, and the likelihood that part of the apparent gap in real labour productivity is actually due to the use of more capital intensive methods of construction in North America.

Tables and Charts The assumptions about construction productivity gains in the scenarios are set out in Table 2. For Scenario 1, Chart 1 shows the detailed CPI effects while Chart 2 shows the job impacts.

Table 2 Simulated Gains in Real Labour Productivity (%) Scenario 1:

closing productivity gaps within Australia

Scenario 2: Scenario 1 plus partly closing the productivity gap with Nth America

Non-residential building 13.0 23.0

Engineering construction 6.5 16.5

Total non-residential construction 9.0 19.0

House building 0.0 0.0

Multi-unit residential building 13.0 13.0

Total residential building 3.9 3.9

Total construction 7.0 13.1

Chart 1

Effects on Consumer Prices - Scenario One

-0.8%

-0.4%

-0.7%

-2.0%

-0.7%

-0.5%

-0.8%

-1.1%

-0.7%

-0.1%

-0.6%

-1.0%

-3% -2% -1% 0%

Food

Alcohol and Tobacco

Clothing and Footwear

Housing

H/hold Furnishings, Supplies etc

Health

Transportation

Communication

Recreation

Education

Miscellaneous

All Groups CPI

Chart 2

Effects on Industry Employment - Scenario One

2.4%

-4.0%

0.8%

0.3%

0.0%

-6% -4% -2% 0% 2% 4%

Mining

Construction

Transport

Other Industries

All Industries