See our state-level analyses of the public cost of low-wage jobs in the construction industry:
Construction in the United States was historically known as an industry where workers without a college education could find family-supporting jobs. Now, job quality for some construction workers has deteriorated to the point that they earn wages too low to make ends meet and therefore fall back on the public safety net to make up the difference. In this paper we look at the use by construction workers and their families in the United States of five means-tested safety net programs. We find that 39% of families of construction workers are enrolled in one or more safety net program at a cost of almost $28 billion per year. In comparison, 31% of all workers have a family member enrolled in a safety net program. Three times as many construction workers as all workers lack health insurance (31% compared to 10%).
Construction is one of the largest industries in the United States. There are approximately 10 million people employed in the construction industry, about 1 in 16 workers nationally. Just prior to the COVID-19 pandemic, in 2019, construction contributed $903.6 billion, or 4.2%, of U.S. GDP. It accounted for $812 billion in personal income, or $1 out of every $23 in total national earnings in 2019.
The construction industry is bifurcated into low-road and high-road sectors, which have strikingly different working conditions. For many non-college-educated blue-collar workers in many parts of the country, the construction industry provides a high-road, viable path to the middle class: workers are paid family-supporting wages and benefits, receive good training, and are provided with safe worksites backed by workers’ compensation protection. The low-road sector of construction, however, “feature[s] some of the worst labor practices in the United States”—low wages, no benefits, exploitation, and often illegalities including wage theft and payroll fraud.
This split into high-road and low-road sectors in construction began in the late 1960s and tracked with sharp declines in unionization in the industry. In 1971, 42% of construction workers were union members; by 2019 the rate had fallen to 12.6%. Erlich and Grabelsky (2005) explain major regional differences in unionization: building trades unions have a relatively strong presence in urban areas of the Northeast, Midwest, and West Coast. However, the number of such markets is shrinking and, even in these markets, there are “large and growing segments of the industry [that] are outside the union sphere of influence.” In residential construction specifically, according to Ormiston et al. (2020), unionization was as high as 50% in 1950, but it fell swiftly to around 20% in the 1970s. “Currently in the single digits industry-wide, the residential sector operates virtually union-free in many trades and regions.” Significantly, these union-free cities, primarily in the Sunbelt, are some of the fastest growing in the country. The low-road model is not confined to residential construction, however; it has spread into the commercial and industrial sectors as well.
The decline in union density significantly eroded the quality of construction jobs overall. Between 1973 and 2006, there was a 17% drop in average real hourly earnings for all construction workers. From 1980 to 1991, the percent of construction workers with employer-provided health insurance declined from 55% to 45%. Participation in employment-based retirement plans went from 39% in 2000 to 27% in 2015. Unionized construction workers are in a far better situation than nonunion workers; in 2015, their wages were 42% higher and their total compensation 78% higher than their non-union counterparts. Regionally, blue-collar construction workers in the South earn wages around 18% lower than those in the West, 20% lower than wages in the Midwest, and 21% lower than wages in the Northeast. A survey of construction workers in six major Southern cities found that over half (57%) earn less than $15 per hour.
Besides depressing wages and benefits in the industry, the decline of unionization also diminished the role unions have been able to play in protecting against exploitative labor practices. This is an especially problematic development given the weakness at all levels of government in enforcement of labor standards, combined with structural incentives that put lawful construction employers at a significant competitive disadvantage. Throughout the country, construction is a highly competitive industry in which projects are frequently awarded on the sole basis of the lowest bid. One of the most effective ways to minimize costs and win contracts is to “reduce labor costs through whatever means possible.” The primary strategies to this end are paying low wages without benefits, misclassifying employees as independent contractors, and paying workers under the table.
Mark Erlich calls construction “the original gig economy,” noting that while independent contractors comprise 7% of the national workforce, around 20% of all independent contractors are construction workers. A significant portion of these workers are misclassified. State-level studies have found misclassification rates in construction of almost 15% in New York and 30% in Virginia. In 2011 an estimated 19% of California construction workers who were independent contractors were misclassified; these workers earned only 67 cents for every dollar earned by comparable workers with employee status. An investigation by McClatchy news found that more than a third of construction workers in Southern states were misclassified. The reason for the excessive use of independent contractors and the high levels of misclassification is obvious. Around one-third of labor costs can be eliminated by classifying workers as independent contractors; employers do not have to pay unemployment insurance, Social Security, Medicare, or workers’ compensation premiums.
Even larger than the problem of misclassification in construction is the practice of paying workers completely off the books. The Alliance for Construction Excellence reported in 2019 that there are fully four times as many construction workers being paid off the books as the number being misclassified as independent contractors (1.2 million to 300,000). The cash-only nature of under-the-table work leaves workers particularly vulnerable to wage theft, though misclassified workers and even legally employed workers can be subject to this as well. A 2009 study of three cities found over 70% of residential construction workers had experienced not being paid overtime or for work done off the clock. Ormiston et al. (2020) estimate that throughout the country in 2017 workers lost between $811 million and over $1 billion in overtime and premium pay due to payroll fraud. A study of construction workers in California found that workers paid under the table earn just 52 cents for every dollar earned by workers with employee status.
The practices of misclassification and paying off the books are most likely to occur in industries where it is most profitable and most easily hidden, both true of the construction industry. Employers in construction can accrue tremendous savings by avoiding employment taxes and workers’ compensation premiums, and the layers and layers of subcontracting characteristic of the industry make these practices easy to conceal. In most states, general and subcontractors are not liable for—and in fact benefit from—payroll fraud found further “down the chain” of subcontractors; these practices continue “with or without the knowledge, assistance or willful ignorance of the owners, developers, general contractors, or construction managers.” Overall, between 12.4 and 20.5% of construction workers are either misclassified or paid under the table.
More than one in five of the construction workers in the six Southern cities study did not have enough money for groceries or bills at some point in the previous year. The impact of low wages and lack of benefits in low-road construction goes beyond the direct effects on workers and their families. It also has costs to society at large. When workers do not earn enough money to meet their basic needs, they often turn to safety net programs to make up the difference.
In this brief we will estimate the public cost to the states and the federal government from the use of safety net programs by construction workers and their families as a result of the low-road practices that are becoming more and more commonplace in the industry.