More Immigration No Solution To Construction Skills Shortage

Michael Wilson has an opinion piece over at Stuff that argues for a return of “10 Pound Pom” or assisted immigration schemes.

If there’s one area where economists lose their minds, it’s immigration. Immigration is good, except when it isn’t. For the construction sector, more immigration is an absolutely insane idea. If you have any idea of how the construction sector operates, Michael Wilson’s column stinks of BS.

The construction sector has a “skills shortage” for 4 reasons as I see it:

  1. The cost of training is borne by sub-contractors who earn low margins on tightly negotiated contracts. They bear the lower productivity of apprentices and cadets for 4-5 years until they’re qualified. Then, most apprentices go to Australia. They have no incentive to train anyone because the marginal costs to them in terms of hassle exceed the marginal benefit of having a trainee on site. They can’t earn a return on their investment in trades training so they don’t hire any trainees! Ergo, as a consequence of under-investment in trades training and regulation, the sub-contractors in construction prefer a temp from Tradestaff when they need additional low or medium skill labour.
  2. The way contracts are designed in the construction sector mean that risk is pushed down the line. The person who is least able to manage the risk (a sub-contractor operating as an unsecured creditor save retentions) is the one who loses when construction firms go under. Aware of their position in the totem pole of risk, and the employment law implications of project-by-project work (if someone is an employee you can’t just fire and re-hire them as work comes and goes like in the US), they will do things themselves instead of hiring people. This means that a lot of construction sector labour doesn’t have much experience – learning by doing is harder with temps. Much of the problems are simply a function of laws around employment and health & safety.
  3. Because of the cost suppression in the industry at all costs, and the enormous supply side shock that was the cut-off of the lending spigot in 2007 to construction in this country, an enormous number of people who would hire construction workers and train them up means that from 2007 – 2013 a whole wave of people haven’t started their construction careers. Many builders and construction firm operators have exited the industry and can’t come back in even though there is high demand for their skills – because their last venture ended badly and they now have an extremely high aversion to debt. Because everything in construction is on credit, hardly anything is going ahead outside of construction projects funded by cashed up developers and the public sector. Local councils, regional councils and the central government are the bulk of demand for construction services in 2013.
  4. On the demand side – construction firms are aware of the people sitting on the sidelines with the skills they need but they are not willing to pay them enough money to justify getting back into the industry. The relationship between contractor and sub-contractor is a de facto employment relationship, and makes sense because construction is a project-by-project industry. But if there really was a skills shortage in construction I would not be personally aware of firms that used to employ a hell of a lot of people doing hardly any work (low demand) and getting tonnes of bids for sub-contracting work (excess supply?) that almost enables them to set the price their sub-contractors will perform skilled work for!

The reason that Michael Wilson and the guy from Fletcher Construction are completely and utterly wrong about the supposed skills shortage is that they are ignoring the tens of thousands of people around the country with construction sector experience sitting on the sidelines because they have a gap in their CV from the past few years when their skills were needed but banks pulled funding for their employers!

They are also ignoring the fact that the uncertainty around the Christchurch joke of a rebuild has seen some firms lose hundreds of thousands of dollars relocating people and equipment to Christchurch eager for work and finding out that the rebuild process will never happen because there’s a cold war between local and central government over how that process plays out. They also come up against Christchurch’s unique business culture that prefers Mainlanders to North Islanders at all costs. Why is this not discussed at all?

There are also thousands of tradies who left for Australia and as Australia slows down as big resource projects get pulled, they will be able to plug some of the “gap”. They will have more capital and are more likely to start their own businesses and employ other construction sector skillsets. So, any “skills shortage” will reduce as the tradies who didn’t make it in Australia come back.

If Michael Wilson had actually talked to people with knowledge of how the construction sector operates, he’d realise that the rates construction firms are willing to pay are too low. Importing more workers to push those rates down even lower is hilariously stupid. Who will train these people to adhere to NZ standards and unique construction practices necessary for our environment? If NZ experienced construction workers can’t find work in the current environment and uncertainty in Christchurch means they can’t justify moving to Christchurch “where the jobs” supposedly are, how is it a skills shortage?

There is no skilled worker shortage in construction. There is, however, a reluctance on the demand side to increase the price they are willing to pay to get the work performed on the time schedule they are demanding. If the rates went up, more apprentices would be hired, more labourers would be hired, more people would gain experience and the self-perpetuating construction skill conveyor belt would kickstart again.

All of this could have been predicted by anyone who spent 10 minutes on a construction site smoko break over the past decade. All of this could have been avoided if we have a finance sector that functioned as an efficient allocator of capital to construction projects. All of this could have been avoided if government had not interfered in construction so much with rules that turn marginal projects unprofitable. All of this could have been avoided if we got over the idea that someone who has never set foot on a construction site has any specialised knowledge to contribute to policy affecting the construction sector.

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