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.

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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 United
States
Australia Peru China Brazil South
Africa
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
0
2
4
6
8
10
12
14
16
18
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
19

Unemployment as a measure of tightness
20
• 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

21
-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
25
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
26
• 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!
29

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
Learn More
www.ihs.com/Chicago2013
Participate in group discussions, network, and acquire techniques to help you:

Thank you!
Laura Hodges – laura.hodges@ihs.com
Emily Crowley – emily.crowley@ihs.com
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Global Construction Outlook: Wage Growth, Labor Shortages and Implications

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