How should we measure productivity?

The Financial Times has an article claiming that Japanese construction workers are far more productive than American workers. But the data they provide seems to suggest the exact opposite:

Reality is the other way around. Despite radically different demographics and essentially no immigration, Japan has consistently employed a much larger share of its workers in the construction industry than the US, although the share has dropped over time. Even at the peak of America’s housing bubble, only about 5.5 per cent of workers were employed in construction. In Japan last year, more than 7 per cent of employees worked in construction

So how can they claim that Japanese workers are more productive than American workers? The article points out that Japan builds far more houses per capita than the US, indeed almost as many houses in total, despite a population only 40% of the US. But why is that? Given that Japan’s population is falling, one might expect exactly the opposite. The article attributes the difference to cultural preferences:

My colleague Robin Harding has elegantly explained that much of the robust demand for new housing can be attributed to the Japanese preference for tearing down and replacing old homes, with the expectation those too will be replaced in short order.

Why are these old homes replaced so often? I live in a home built in 1930, which certainly does not need to be torn down and replaced, indeed any replacement would likely be of lower quality.

Here’s another way of thinking about the productivity question. In both countries, the vast majority of people have homes to live in—somewhere around 99%. So then the question becomes: In which country does it require more labor to provide a flow of housing services, which keeps a roof over the head of 99% of the population? And the answer is clear—it takes much more labor (per capita) to house the Japanese population than the American population. That suggests that Japanese labor productivity is lower.

Of course we also need to consider quality. American housing is provided with far fewer workers, but perhaps Japan’s housing is of far higher quality. So maybe the quality adjusted housing productivity is higher in Japan.

One important component of quality is size. Are Japanese houses far bigger than American houses? Maybe, but given that America has a reputation for enormous houses, and given that even Europeans consider Japanese houses to be tiny, I’m not willing to accept that claim without firm data.

Maybe Japanese houses are much smaller than American houses, but they are built with such jewel-like precision that the quality is higher despite being smaller. But in that case why are Japanese houses torn down just a few decades after they are built?

The FT article doesn’t even come close to justifying the claim that Japanese construction workers are more productive than American construction workers. There are some problems with American housing quality, particularly for homes built during the 40 years after WWII. But more recently built homes seem to be of pretty good quality, with lots of amenities such as multiple bathrooms and granite countertops. We are a long way from the Levittown ranch houses of the late 1940s. Last year I went to an open house for a 3500 sq. feet Toll Brothers house, which would probably be regarded a mansion in Japan. It counts as “one house” in the US data.

Rather than better construction productivity, the real story may be that Japan has better (more flexible) zoning rules, which makes it easier to build new homes. It’s not our construction workers that have low productivity, it’s our government.

BTW, A recent WSJ article reminded me of the debate over manufacturing—is the job loss trade or automation? Here’s just one more piece of evidence that it’s mostly automation:

Later this year, a new Chevron Phillips facility capable of producing 1.5 million metric tons of ethylene a year is coming online in Baytown, Texas. It covers a plot the size of 44 football fields and is made up of 350 miles of pipe, 40,000 tons of steel and 140,000 tons of concrete. It has taken four years to finish.

During the height of its construction, more than 4,500 construction workers and engineers were on site. Once operational, it will only take around 200 employees to run.

American manufacturing has a very bright future–just don’t expect any more jobs.

The same article suggests that this plant is not a fluke:

In April, Exxon said it selected a site near Corpus Christi, Texas, for a $9.3 billion petrochemical complex it is building jointly with Saudi Basic Industries Corp. The proposed facility, the largest of its kind in the world, is expected to be done by 2021 and produce 1.8 million metric tons a year of ethylene, the main component of plastic.

“We don’t see this as a bet,” said Neil Chapman, president of the chemicals unit at Exxon, which is investing a total of $20 billion in such projects along the Gulf of Mexico. “You’ve got to pinch yourself sometimes and say ‘this is the envy of the world.’ ”

Dow’s plant in Freeport, Texas, when fully operational by the end of the year, will produce 1.5 million metric tons of ethylene annually. The company plans to export at least 20% of the plastic it makes in the U.S. and is particularly eyeing Latin America as a ripe market.

So maybe 600 jobs. Which is basically nothing.