Building Even Bigger Problems

Urgent action is needed to prevent Australia’s construction industry from collapsing under the weight of rising labour costs, red tape, and excess government spending, argues IPA Research Fellow Kevin You.

September 2023 will mark the 10th anniversary of the opening of the Gold Coast University Hospital: a 750-bed, state-of-the-art health facility next to Griffith University’s flagship campus. The construction of this $1.76 billion project was mired in industrial dispute. Strike actions by up to a thousand workers brought traffic on the Pacific Motorway to a standstill. Angry construction workers even shut down parts of Brisbane city in their rally against alleged unlawful working conditions and the use of independent contractors (allegedly evidence of ‘sham contracting’). Campaigns and propaganda of this kind have been a more-or-less constant feature of the construction unions and allied political organisations like the ACTU and the ALP ever since.

Australia already has a set of robust industrial laws that prevent the underpayment of wages, unfair and unlawful practices, and actual sham contracting. But the Albanese Government’s industrial relations agenda suggests this is not enough. The next set of IR reforms under this Government seeks to further narrow the scope of what are lawful and legitimate forms of work, so as to all but outlaw working arrangements which do not provide the most conducive environment for union recruitment.

Its latest campaign against independent contracting is purported to:

‘Close the loopholes’ that undercut the principles of the Fair Work Legislation Amendment … A key ‘loophole’ is the significant difference between the rights and protections afforded to employees compared to workers who perform work as independent contractors.

Its policy of enforcing ‘same job same pay’ measures in the workplace is purportedly aimed to:

Address the limited circumstances which host employers use labour hire to deliberately undercut the bargained wages and conditions set out in enterprise agreements made with their employees.

At first glance, they sound fair and simple enough. But the reality on the ground is quite different. Questions must be asked as to what constitutes the ‘same job’ or the ‘same pay’ in the context of building and construction, when no two workers do the exact same thing at the exact same level of efficiency, or want the exact same set of pay and conditions. The nightmare of applying the better off overall test under the Fair Work regime is testament to the innate difficulty of answering these questions. Moreover, direct employees, independent contractors, and labour-hire workers have inherently different functions. State intervention to mandate that people are paid equally despite unequal contributions and incomparable functions feels eerily Stalinist and dystopian.

More industrial red tape risks breaking the construction industry.

The construction sector will be disproportionately affected by the upcoming set of changes. Labour hire workers represent about two per cent of workers in Australia. The figure is about double (around four per cent) in the construction sector, which is about 53,000 workers. The share of workers in the building and construction sector who are not employees adds up to 36 per cent. That is higher than any sector in the Australian economy other than agriculture, forestry, and fishing. The majority of these workers are independent contractors: enterprising individuals who operate their own businesses, much like barristers and family doctors do.

Flexibility is of the essence in the construction sector.

The building and construction sector engages a higher percentage of independent contractors and labour-hire firms than most other sectors in the economy for a good reason. For a start, construction is complex and requires a great deal of flexibility. A large project site features multiple layers of sub-contractors working under the umbrella of a principal contractor.

Construction firms such as Lendlease, Thiess, and John Holland manage and coordinate the work of a multitude of sub-contractors, who in turn may sub-sub-contract parts of any project allocated to them. The relationship between all these different actors in a worksite is complex and interdependent. For instance, air-conditioning and light installation cannot happen before the electrical wiring is properly sorted. This, in turn, is dependent on concreting to have been completed – which, in turn, is dependent on steel frames having been delivered and foundation work to have been done to a satisfactory standard. Any delay in one part of the project will have a flow-on effect on other parts, and delays do often occur because rushing to complete a task is a recipe for disaster.

Worksites are constantly at the mercy of weather conditions. Flexibility, therefore, is of the essence in Australia’s building and construction sector if it is to remain competitive and viable. Workers need to be able to be called in at short notice and there will be unforeseen periods when no work is able to be completed, such as during disruptive weather. There is another reason why independent contracting and labour-hire firms are so important in the sector. The Royal Commission into Trade Union Governance and Corruption—established by the Abbott Government—found the Australian building and construction industry has a culture of lawlessness, which features threats, extortion, and intimidation instigated by trade union officials. Indeed, the culture of lawlessness was the product of union domination of the sector. Engaging labour-hire firms and independent contractors is a way to avoid union bullying, especially now the Australian Building and Construction Commission has been disbanded.

The imposition of more industrial red tape on engaging independent contractors and labour-hire firms on worksites will risk breaking the industry. The average wage in the construction sector over the last decade is already around 25 per cent higher than the national average. Workers in large, union-dominated worksites often earn even more—many times the national average.

Chart 2: Average Weekly Earnings in the Construction Sector

The effect of Labor’s proposed legislative changes goes beyond increasing the pay of building and construction workers. It will add to the cost of compliance and add-on costs for employing people which are not included in the above earnings calculation.

Labour cost in the construction sector is over-inflated.

Australia is already the fourth most expensive country for construction workers. The latest research report by Turner and Townsend on the construction sector around the globe found that out of the 40 countries included in the study, Australia has among the most expensive construction labourers, ranking behind only Switzerland, Austria, and the United States. The average hourly rate to hire a construction worker in Australia is $111, approximately 273 per cent the average cost across all the countries surveyed, at $41.

The said hourly rate represents the total cost of labour to the employer, which includes allowances, taxes and bonuses. Since the average hourly earnings of a construction worker, according to the Australian Bureau of Statistics, is $32, this suggests that the rest, amounting to $79 per hour—or 242 per cent the average hourly pay—is made up of add-on costs. In Australia, this includes any benefits payable to the union (such as training fees), income and payroll taxes, workers compensation, workers compensation insurance, and superannuation entitlements.

Data from Turner and Townsend’s report reveal—as shown in Table 1—that the cost of construction labour in Australia even exceeds those in the world’s most expensive cities such as Tokyo, London, and Hong Kong.

Chart 3 (below) compares Australia’s construction costs against costs in a selection of major economies included in the study. It shows Australia as having one of the highest labour construction costs in the world—and by far the highest in the Indo-Pacific region.

Highly developed nations in the region have much more affordable construction labour costs. For instance: Japan’s is $44 per hour, which is 60 per cent less than Australia’s. South Korea’s is $37.08 per hour, 67 per cent less than Australia’s. Singapore’s is $36, which is 67 per cent less than Australia’s. For context, each of Japan’s and South Korea’s gross domestic product per capita is only about 40 per cent less than Australia’s, and Singapore’s is even higher than Australia’s. But the labour costs in their construction sectors are considerably lower.

Chart 3: Labour Cost per Hour by Country in Australian Dollars

The comparison demonstrates the fact that labour cost in Australia’s construction sector is over-inflated. The labour cost premium in construction is set to increase even further because of the government’s ambitious IR agenda, which will disproportionately affect the building and construction industry.

Every single Australian respondent surveyed by Turner and Townsend said that rising costs of construction had a significant or high impact on the delivery of construction projects, which affect overall productivity and the attractiveness of investment in our building and construction sector.

Australia’s punitively high labour cost is one of the key reasons for the stubbornly low level of private sector investment in its economy. At just over 10 per cent, private sector investment as a percentage of the nation’s GDP is close to a record low.

Chart 4: Private Sector Investment as a Share of GDP

The consequence of low levels of private sector investment is that the Australian economy is more and more dependent on State initiatives. Acardis’ International Construction Costs 2023 Report echoes the notion that much of the expected growth in Australia’s construction activities are driven by the public sector as well as government initiatives:

A sudden influx of government committed spend of A$10 billion for health projects, combined with the A$7bn projected investment for the 2032 Olympic and Paralympic Games will see Queensland become an overheated market with a lack of local capacity to deliver.

In other parts of the country:

We anticipate that demand for net zero related investment will start to increase over the next 12-24 months, so specification changes influenced by carbon calculations will likely begin to impact costing … Key projects include the Melbourne Airport Rail link and Sydney Metro Rail. Meanwhile, significant investment in energy transition across Australia will begin to make this market increasingly attractive to infrastructure players.

Over the last 10 years, the share of private sector construction, as a percentage of total value of work, has declined from 75 to 57 per cent, while the share of publicly funded construction projects has increased from 25 to 43 per cent. The construction of State-funded mega-projects such as Melbourne’s 90km Suburban Rail Loop, Snowy Hydro 2.0, and North Queensland’s 5,000 MW pumped hydro dam in Pioneer-Burdekin are just a few examples which will exacerbate the situation. Government will play an increasingly important role in the sector, pushing out private initiatives which will be outcompeted by the public sector when it comes to resource and capital acquisition.

Chart 5: Share of Public vs Private Sector Construction

The value of private sector construction for private sector purposes has declined from a high of $101 billion in 2012 to approximately $60 billion by 2022. The value of private sector construction work commissioned by the government has almost doubled from just under $17 billion a decade ago to over $31 billion by 2022. This means more and more of the construction projects done by the private sector are commissioned by the government and paid for with taxpayer money.

Much of the value of the non-government-commissioned private sector projects still relies on government subsidies, loan guarantees, and other incentives, such as those provided for the construction of private solar and wind farms. These projects would not have commenced without the government’s commitment to the policy of net zero emissions by 2050.

Industrial relations changes will worsen the cost of living.

In an economic environment characterised by a severe worker shortage and high inflation, the increasing role of the public sector in building and construction can only crowd out the market, thus making it more expensive for private sector clients to engage construction workers and developers. Over the last decade, every percentage increase in the government’s share in construction activities is associated with a $502 increase in construction wages per person per year. Over the last 10 years, then, construction labour price inflation has cost the Australian economy approximately $5.6 billion.

The aforementioned IR changes will aggravate the problem by further increasing the cost of labour in construction. The flow-on effect will be to worsen cost-of-living pressures felt by Australian families, because an increase in the cost of construction will eventually be passed on to the end consumer. A higher cost of building warehouses, distribution centres, and retail venues, for example, will result in higher retail prices.

It does not stop here. A higher construction cost for government-funded projects leads to more government spending, much of which will be financed through acquiring more debt. More spending and higher debt, in turn, leads to an increase in the supply of money in the economy which again leads to higher inflation and worsening cost-of-living pressures. This mechanism was detailed in a landmark IPA Report, ‘Australia’s Spending Crisis: Estimating The Effect Of Federal Government Spending On Household Mortgage Repayments’, published in May 2023 and available on the IPA website.

In the short run, construction workers may appear set to benefit from higher labour costs. But devastating the entire industry in this manner will not benefit anyone in the long run—not even the unions. Higher construction costs and resource scarcity will drive away investors, jobs will dwindle, and the construction sector will find itself at risk of collapse.

The economy is already forecast to stagnate, with GDP growth expected to halve from 3.25 per cent in the financial year ending 2023 to 1.5 per cent in 2024. In the next year, government spending will soar to avoid a recession and maintain positive growth, which is forecast to reach just 2.25 per cent per annum. Given the unacceptably high level of inflation—at seven per cent per annum—the cash rate target of the Reserve Bank of Australia can only go up, affecting the real estate, building, and construction industries more than any other.

No investor sees an environment of low economic growth, resource scarcity, high electricity prices, a chronic worker shortage, and high interest rates as an attractive environment in which to invest capital. Australia’s construction sector must overcome this challenge.

Australia’s construction labour cost is already one of the highest in the world and the highest, by far, in the Indo-Pacific region. The implementation of the Federal Government’s ‘same job same pay’ and ‘employee-like’ IR policies will make the cost of hiring construction workers even more unaffordable. This is not just because they will increase wages to unsustainable levels, but also because they are a compliance nightmare threatening to stifle the whole industry. They will lead to more powers given to union bosses, more strike actions, more delays in worksites, more cost blowouts, a greater reliance on government intervention, and more complexity and uncertainty in managing workers. The proposal has already been described as posing an ‘existential threat’ that will lead the construction sector down the path trodden by Australia’s manufacturing sector: a path towards collapse and oblivion.

This must not be allowed to happen.

This article from the Winter 2023 edition of the IPA Review is written by IPA Research Fellow Kevin You.