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.

VFX Industry Worker Rights (The Real World Comes To Creative Workers)

This morning on my way into university I listened to a very interesting piece about VFX industry worker rights. There wasn’t much discussion of why Hollywood needs to squeeze margins of contractors whenever it can, and why it constantly looks for government handouts around the world. If there is one industry that displays the very worst behaviour in terms of rent seeking in the form of subsidy / tax credit shopping it is the film industry.

But why do big Hollywood studios have to make a dollar any which way they can? Well, it’s because contrary to popular opinion they lose money hand over fist. Hollywood studios are enormous money losers. They are playing a numbers game where they incur substantial upfront costs on a chance that a movie becomes a hit and not only pays for itself, but pays for the studio’s other losers that season.

The success of Disney has been in realising that movies are loss leaders for massive merchandising and alternative revenue streams. Think about the Pirates of the Caribbean and how they will milk that franchise just from the merchandising alone. In the real world, when your business model depends on your winning hit movies paying for all the losers and the administration costs of running a studio and all of the interest on the short-term financing you use to rollover your monthly cash flow requirements while waiting for a hit, squeezing the lowest person on the totem pole is not surprising behaviour.

Apparently every other part of Hollywood has a guild operating on its behalf – directors, writers, cameramen, makeup artists – they all have an organisation lobbying on their behalf and hooking them up with pension and health care support in exchange for their dues. This also means that it is hard to squeeze labour costs here, so of course studios will squeeze labour costs elsewhere which means outsourced VFX workers.

This isn’t good or bad – it’s simply the real world, moving up the socioeconomic ladder from the working class to the creative class. And Radio New Zealand workers would have been absolutely furious listening to how big bad studios don’t offer any job security to VFX industry workers. They might even be awarded contract extensions as late as 1 week before a contract expiring. Quelle horreur!

All I have to say to VFX workers trying to soften up people for supporting your industry is welcome to the real world. Because of globalisation and the ease of outsourcing, your labour is interchangeable with lower labour cost countries. There is no such thing as rights when there’s a temporary contract involved.

This has been the situation in the construction sector for the past few decades. Risk is shifted down the totem pole to those least able to bear it. High volatility in wages and difficulty obtaining prompt payment lead to enormous strife and second-order effects. Sadly, you won’t find Kathryn Ryan getting so worked up about the inability of a builder in Petone to put food on the table after getting screwed over by a contractor even after protecting himself as best as he could under the Construction Contracts Act and prudent practice in the construction sector.

It is things like this that make me laugh. The creative class are being brought down to the level of insecurity that the working class have had foisted upon them over the past few decades, and they don’t like it one bit. But sadly, because they are essentially a branch of the government, they are more likely to hear their pleas heard and get something done whether it be subsidies, tax credits or other forms of government support.

The guys on the interview talk about how studios send the easy shots to India and the hard shots to places like New Zealand, and then whittle down the VFX margins because they can’t put much markup on a time intensive VFX process. It sucks if you are a VFX worker, but please, complaining about a few months delayed payment from a corporate is a whole different kettle of fish compared to a few months delayed payment from a developer or local construction firm – the studio is several orders of magnitude more reliable, they’re just managing their cash flow extremely well because their business model loses money most of the time.

Now, I’m not unionist, but as an economist it would be remiss of me to ignore the role that unions play in exercising collective bargaining rights and other sorts of behaviour some on the right would call blackmail. In a way, the myth of the independent bargaining agent is that some people actually think that, by themselves, they will be able to achieve a bargain better than they would under a union arrangement.

In theory, contracting is a fantastic way of doing things. But in the real world, it sucks. It is a winner take all competition, not an auction for skills. Many contractors have essentially bought themselves a job – think of the Chorus linesmen made to buy their vans and gear who are now making a pittance on what they used to.

The trend in the labour market over the past few decades has been away from stable employment relationships towards unstable employment relationships. Yes, it makes sense for an industry that works on a project-by-project basis to use contractors. It saves the cost of paying someone to do nothing while there is no work to be had. But it also incurs other costs, as VFX industry workers are finding out.

The creative class used to think that they were above the costs of competitive markets. They thought that they were special, that they deserved privileges and that their role as the anointed ones set them in such a position in society that they are somehow worthy of government assistance if their privileges are attacked or whittled away through maximising behaviour of those they enter into contracts with freely.

The working class have been pushed towards contracting arrangements for a long time now. They got no support. They’re internalising the costs of their situation, and for VFX industry workers, who earn more when they actually are working than many working class contractors, to have the chutzpah to have a moan and ask for mummy & daddy taxpayer to make things better for them is hypocritical in the extreme.