Global Construction Outlook: Wage Growth, Labor Shortages and Implications

Global Construction Outlook: Wage Growth, Labor Shortages and Implications

August 27, 2013

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Today’s Speakers

Emily Crowley

Economist, Pricing and Purchasing Service, IHS

Emily Crowley is an economist in IHS’s Pricing and Purchasing group. She is a

graduate of the George Washington University, where she earned a B.A. in

economics and international affairs with a concentration in international

economics. She currently works in the North American labor division,

specializing in wages and assisting in the Global Manufacturing and Global

Construction Compensation reports.


Today’s Speakers

Laura Hodges

Director, Pricing and Purchasing Service, IHS

Laura Hodges is the director of IHS’s Pricing and Purchasing Service. She

covers the analysis and forecasts of global labor and healthcare costs. She is

also responsible for the management and operations of the pricing research

team. She has worked for IHS for more than 15 years. She received her M.A.

in Health and Labor Economics from Duke University. She also received her

MBA from Rutgers University in Beijing, China and her B.A. in economics from

the George Washington University.

She has spoken extensively on the topic of global cost environment, including

a recent presentation at the Institute of Supply Management (Has China Lost

Its Low-Cost Edge?) and the Association for the Advancement of Cost

Engineering conference (Economic Risks To Consider Before Bidding Your

Next Contract and Estimating Skilled Labor Shortages).

Skilled Labour Shortage Myth or Reality?

Laura Hodges, Director, Pricing and Purchasing Service

Emily Crowley, Economist, Pricing and Purchasing Service

Tuesday, August 27, 2013


Agenda

• Where are we now?

• What are the primary drivers of wage growth?

• What does the future hold for these wage drivers?

• Two hotspots - United States and Canada

• How are they dealing with it?

• Where else can you expect strong wage growth?

• The global labor cost outlook

8


What do we mean by skilled labor?

• Skilled laborers – occupations that require advanced training,

several years of on the job experience, certification

• Welders, Pipefitters, Electricians, Boilermakers…

9 Source: Bureau of Labor Statistics; IHS Construction Wage Outlook, March 2013

8% 2%

28%

13%

49%

Share of Employment

23%

3%

31% 9%

34%

Share of Wage Bill

Project Manager

Engineering

Skilled Trades

Office & Admin

Unskilled

US Construction Sector By Employment


Where are we now?

• According to a Manpower survey, in 2012 34% of employers

reported difficulty filling jobs, up from 30% of employers in

2009 but down from 41% in 2007

• Skilled trades tops the talent shortage list in 2012

• Some countries are experiencing double digit wage growth

due to shortages resulting in cost overruns, project delays,

and cancellations

• Understanding the drivers of wage growth can allow cost

estimators identify potential skills shortages and plan

accordingly

10


Where are we now?

15

25

35

45

55

65

2006 2007 2008 2009 2010 2011 2012

Current Shortages Not Yet at Pre-Recession Levels

(Percent of firms reporting difficulty filling jobs)

Global Americas APAC EMEA

11 Source: 2012 Manpower Talent Shortage Survey


What drives wage escalation?

• Inflation

• Sets floor for wage growth

• Understanding the inflationary environment can be key to identifying

strengthening fundamentals; an indicator of labor shortages

• Supply/Demand Balance

• Labor market fundamentals are the key determinant of real wage

growth

• Shifting dynamics between available supply and changing demand

will influence which party has the upper hand in negotiations

12


Inflation is a key wage determinant

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010 2011 2012

Strong Inflation Can Mask Fundamental Weakness

(Growth, percent change)

Wage Growth, Venezuela Inflation Growth, Venezuela

13 Source: IHS Construction Wage Outlook, March 2013


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Germany Canada UnitedStates

Australia Peru China Brazil SouthAfrica

Inflation Expectations Vary by Country (Average growth rate, percent)

2006-2012 2013-2022

Other countries struggle with inflation too

14 Source: IHS June 2013 Forecast


What drives demand?

• Project investment

• Primary driver of skilled labor demand

• Fuelled by business cycles, commodity prices, global demand

• Labor requirements

• The type and size of the project will determine construction labor

requirements including size of labor force and skill demand

• Productivity

• Has potential to offset demand growth

• Can vary by project

• Employment pull from other sectors

15


Global demand remains robust

16 Source: IHS 2013Q1 Forecast – oil and gas CAPEX only

-15

-5

5

15

25

35

0

250

500

750

1,000

1,250

2004 2006 2008 2010 2012 2014 2016

CAPEX Drives Demand

Global CAPEX Spending (Billions, USD)

Pre-Recession Peak

CAPEX Growth (Right axis, percent change)


Strong CAPEX is driving labor demand

• CAPEX spending in 2012 was 30% higher than pre-

recession spending

• CAPEX growth will continue to drive labor demand with

continued positive growth led by investment in the

unconventional oil and gas sector

• Unconventional projects have higher skilled labor

requirements, increasing base labor demand

• But projects in remote locations do mean a smaller labor force

• New technology will limit near-term productivity growth,

projects down the road benefit

17


Pay attention to regional differences

02468

1012141618

Demand Will Vary By Region (Growth, percent change)

CAPEX growth 2007-2012 CAPEX growth 2013-2016

18 Source: IHS 2013Q1 Forecast – oil and gas CAPEX only


Supply is the last key determinant

• Size of available labor force

• How large is the labor force

• Demographic trends

• Unemployment rate

• Measure of labor force availability

• Indicator of supply/demand fundamentals

• Return on Investment (ROI)

• Measures the return associated with:

• Entering the skilled labor force (factors in cost of training/certification)

• Staying in the skilled labor force vs. retiring

• Regulations, immigration polices

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Unemployment as a measure of tightness

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• Comparing current unemployment levels to the 5-year average can be used as an indicator of labor market tightness

• Unemployment in emerging economies is below the five year average • These economies have strong construction activity linked to infrastructure

development, residential, and commercial projects

• Unemployment below the 5 year benchmark should raise a red-flag for potential shortages

2013 2008-2012 2003-2007

Australia 5.6 5.1 5.1

Brazil 5.5 6.8 10.6

Canada 7.1 7.4 6.8

China 4.1 4.2 4.2

Germany 6.9 7.5 10.5

Peru 6.3 7.8 9.1

South Africa 25.1 24.3 26.4

United States 7.6 8.3 5.2

Labor Markets Tighter in Emerging Economies

Unemployment Rate

Source: IHS June 2013 Forecast


-5% 0% 5% 10% 15% 20% 25% 30% 35%

Africa & Middle East

Latin America

Asia-Pacific Excl. China

North America

Europe

China

Demographics Will Determine Long-Term Labor Force Trend

(Labor force growth 2012-2025)

Demographics will play a role in the future


The US Gulf Coast – An emerging hotspot

• Demand remains strong

• High oil prices continue

• Shale gas encourages other projects - IHS Chemicals estimates that

the downstream projects will deliver $100 billion in CAPEX over the

next decade

• Supply has tightened

• Attrition from the construction industry during the recession combined

with a drop in apprenticeship enrollments means supply has tightened

• Wage growth among skilled professions will increase in the

5% range per year through 2016

22


The US Gulf Coast – An emerging hotspot

• Construction employment

in USGC is 4% below 2006

levels compared to 30%

below nationally

• Growth stagnated for

vocational programs

• More progress on college

education

23

-4%

-30%

-50%

-40%

-30%

-20%

-10%

0%

10%

Gulf Coast Has Tightest Construction Labor Market

(Percentage of workforce lost, 2006-May 2013)

Gulf Coast US

4,000

4,500

5,000

5,500

6,000

People 25 years and over who completed a two-year vocational program

(thousands)


Workers are available in parts of the US

24

Ratio of Current to Peak Construction Employment

Below 50%

Greater than 50%

Greater than 60%

Greater than 70%

Greater than 80%

Greater than 90%

The middle part of the country is tighter


Demographics will play a role in the future

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US Skilled Workforce is Aging

2000 2010 2000 2010

Welders 38.4 40.9 30% 40%

Pipefitters 38.9 41.4 28% 40%

Electricians 39.2 41.5 31% 41%

Average 38.8 41.3 30% 40%

Source: Bureau of Labor Statistics Current Population Survey

Average Age Share of Workforce Over 45

The picture is the same for many industrialized

countries, including Japan, Germany, and the UK


US regional variation is important

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• An unemployment rate of

less than 4% signals

potential shortages

• Presence of oil market

does not guarantee a tight

market

• Almost all regions listed are

below the 5-year average

• Particularly Odessa

• Training should be an

option in regions with

higher unemployment

April 2013 5-year average

Bismarck, ND 3.1 3.4

Midland, TX 3.0 4.3

Odessa, TX 3.7 5.9

Casper, WY 4.3 5.5

Baton Rouge, LA 5.9 6.3

Lafayette, LA 4.6 5.0

Lake Charles, LA 5.6 6.0

Shreveport, LA 6.6 6.4

Pascagoula, MS 9.0 9.2

Bakersfield, CA 12.1 13.7

TOTAL 7.6 8.3

US Unemployment Rates - Top Oil Towns

Source: Bureau of Labor Statistics


Canada Oil Sands – A cooling hotspot ?

• Development of the Alberta oil sands has driven up CAPEX

spending, which has averaged 8.2% growth per year over

the past decade

• Remote project locations and their large labor requirements

pushed unemployment to the lowest level in Canada

• Supporting an average construction wage growth of 5.5% over the

past six years

• Programs to bring in temporary foreign workers (TFWs) as

well as train Canadians to fill gaps is helping to alleviate

shortages

27


Canada Oil Sands – A cooling hotspot ?

0

20

40

60

80

2008 2009 2010 2011 2012

Skilled & Tech Positions filled by TFWs (Thousands)

Canada excl. Alberta Alberta

0

250

500

750

1000

1250

2007 2008 2009 2010

Change In Apprenticeship Training (Completions compared to Prior Year)

Heavy equip mechanics Welders Electricians

• Alberta accounted for 50% of Temporary Foreign Workers (TFWs) in Canada in 2012 compared to 30% in 2009

• Apprenticeship completions

increased by 1,200 in 2010

compared to 700 in 2008

28


Where are potential shortages in the future?

Countries At Risk for Labor Shortage

Shortage

Indonesia

Peru

Brazil, Chile,

China, India,

Mexico, Norway,

South Africa,

Thailand, Turkey

Australia,

Canada,

Colombia,

Russia,

Venezuela

Germany,

United Kingdom,

United States Poland

Based upon the last 3-year environment for employment growth, unemployment, CAPEX

growth and education

Not A Problem

What does this mean?

We selected 20 countries from around the world and compiled estimates on employment,

unemployment, CAPEX and education in each of these countries. Further we looked at the

experience over the last three years for each of these components and compared to the

average to understand if labor market conditions were tight in this country.

Watch out for new projects in Indonesia or Peru!

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Where are potential shortages in the future?

Indonesia

• The fourth largest country (in terms of population)

• But only 20-25% of population with higher education

• Low and falling unemployment rate

• Strong investment and economic growth

Peru

• Strong investment growth (40% in last three years)

• Country is rich in natural resources, particularly minerals

• Falling unemployment rate and small labor force

30


The global wage outlook

31

Skilled Trade Wage Growth Rates by Country

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007-2012 2013-2016

Canada 3.7 8.3 3.9 2.7 1.2 2.9 3.1 2.8 3.4 3.4 3.8 3.2

United States 12.2 4.8 -0.3 2.4 -1.5 2.4 3.7 4.5 5.1 4.5 3.3 4.4

Brazil 4.6 8.5 7.6 13.5 9.1 11.7 7.6 10.6 10.3 8.3 9.2 9.2

Peru -1.2 8.1 2.1 8.0 4.6 5.5 6.6 7.7 7.9 6.4 4.5 7.2

Germany 1.5 2.5 3.8 2.4 1.8 3.2 2.0 1.7 2.4 3.2 2.5 2.3

Russia 24.4 44.5 -0.3 24.1 6.9 11.7 7.2 11.2 9.9 9.8 18.6 9.5

Australia 4.7 4.9 4.7 3.7 5.2 5.1 4.5 4.5 4.9 4.9 4.7 4.7

China 13.0 13.0 13.0 15.0 18.0 11.0 12.0 12.0 12.0 12.0 13.8 12.0

Indonesia 7.4 9.3 4.8 5.4 12.0 11.9 10.0 10.6 10.7 10.4 8.5 10.4

South Africa 10.3 15.3 15.3 22.1 7.7 11.3 12.0 12.0 12.1 12.7 13.7 12.2

Source: IHS Global Construction Wage Study

Strongest real wage growth for Brazil, China,

Indonesia, Peru and Russia


Why is the outlook benign for US and Canada?

• Nationally demand trends are not as robust

• We need to look at the regional and sector trends to pick up

on that activity and labor market tightness

• We are not back to the situation of the 2007/8 boom

• Employers are cautious – they want a qualified worker, not just any

worker

• Not all countries and sectors are in full cycle

• Workers may be harder to find in some regions but if you are willing

to pay to move, they are available

• Demographics and supply are a future risk

32


What can be done to help with shortages?

• Recruiting more aggressively in countries with less demand

– and there are a few right now!

• Explore off-site construction options, such as prefabrication

and modular construction, to reduce local labor demand

• Invest in training and/or establish local training programs to

address the skills gaps in the workforce

• Offering higher supplemental pay to avoid locking into

higher base pay

33


Conclusion

• Sourcing skilled workers can be difficult and expensive – but

shortages are regional

• Watch supply, demand and inflation measures to understand

where wages are heading

• CAPEX is a major determinant

• The Canadian Oil Sands region and the US Gulf Coast have

struggled with availability of skilled workers

• Canada has eased foreign worker restrictions

• Red flags should also be raised for Indonesia and Peru

• Finding qualified and skilled workers will be a challenge

• Be prepared and monitor these key drivers to understand

current and future pressures

34


Pinpoint the primary drivers of commodity

prices Recognize buying opportunities Mitigate risk by understanding commodity

market fundamentals Negotiate purchases more effectively Identify risky suppliers and ensure continuity

of supply

35

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Thank you!

Laura Hodges – [email protected]

Emily Crowley – [email protected]

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