Special Studies, May 1, 2014
By Paul Emrath, Ph.D.
Economics and Housing Policy
National Association of Home Builders
Report available to the public as a courtesy of HousingEconomics.com
This article updates NAHB’s estimates of the economic impact that residential construction has on the U.S. economy. These national estimates are designed for use when the impacts on all U.S. suppliers of goods and services to the construction industry—for example, manufacturers of building products—are of particular interest. The national estimates should not be used to try to analyze economic impacts confined to the state or local area where the housing is built. NAHB has a separate Local Economic Impact section on its web site for that.
The national estimates for 2014 include the following:
- Building an average single-family home: 2.97 jobs, $110,957 in taxes
- Building an average rental apartment: 1.13 jobs, $42,383 in taxes
- $100,000 spent on remodeling: 0.89 jobs, $29,779 in taxes
The jobs are given in full-time equivalents (full-time equivalent is enough work to keep one worker employed for a full year based on average hours worked per week in the relevant industry). The term taxes is used for revenue paid to all levels of government—federal, state, county, municipal, school district, etc. The tax estimates include various fees and charges, such as residential permit and impact fees.
The impact of a new housing unit depends on, among other things, the value of construction per unit. The first two sets of estimates are based on projections of the value of construction of average single-family homes and rental apartments that will be built in 2014. Details are provided in the following sections, which also describe the methodology used to generate the estimates, including data sources, and break down jobs by industry and government revenue by category of tax or fee.
Wages, Jobs and Profits by Industry
Probably the most obvious impacts of new construction are the jobs generated for construction workers. But, at the national level, the impact is broad-based, as jobs are generated in the industries that produce lumber, concrete, lighting fixtures, heating equipment, and other products that go into a home or remodeling project. Other jobs are generated in the process of transporting, storing and selling these projects. Still others are generated for professionals such as architects, engineers, real estate agents, lawyers, and accountants who provide services to home builders, home buyers, and remodelers.
Conceptually, estimating the effects in each industry is a fairly straightforward exercise in manipulating national accounts maintained by the U.S. Bureau of Economic Analysis, as the flow diagram below indicates:
In practice, the process is slightly more complicated than the diagram suggests, primarily because the industry categories BEA uses in the input-output accounts and income and employment by industry tables do not match up perfectly.
A key part of the process is inputting the dollar value of construction. Because this article is estimating impacts for calendar year 2014, the inputs are projected average construction values for new single-family homes and rental apartments that will be built during 2014. The projections are average construction value of $323,000 for single-family homes and $128,000 for multifamily rental apartments (equivalent to market value of $378,000 and $143,300, respectively). Details and data sources for these projections are given in the appendix. For remodeling, a construction value of $100,000 was chosen as convenient round number on roughly the same scale as construction value for a new housing unit.
The jobs, wages and salaries, and profits generated by these construction values are summarized in Table 1:
The estimates are based on total requirements from the input-output accounts, so they capture not only products and services of industries directly used in construction, but the indirect effect of products and services used by those industries as well. For convenience, the table shows detail for relatively broad industry categories.
At this level of detail, the largest share of wages and salaries are generated in the construction industry, followed by manufacturing, trade & transportation & warehousing, and professional & management & administrative services.
At a more granular level, within manufacturing, substantial shares of the wages are generated in many categories of wood products (led by wood kitchen cabinet and countertop manufacturing). Outside of wood products, the largest shares of the manufacturing jobs are generated in the production of concrete, and ornamental & architectural metal products.
Within trade & transportation & warehousing, the largest shares of wages are generated in retail trade, wholesale trade, and truck transportation. Within professional & management & administrative services, the largest share by far is in architectural and engineering services.
Note that, in the construction industry, profits of proprietors are 40 percent as large as wages and salaries. Included in this category of proprietors are subcontractors. In a recent NAHB survey, two-thirds of single-family builders said they subcontracted out more than 75 percent of their construction work. Often these subcontractors are quite small, even one-person operations. The Census Bureau’s most recent (2011) statistics show 1.7 million specialty trade contractors without a payroll, who have average annual revenue of under $45,000. These subcontractors are not included in the jobs figures in Table 1; because, technically, the government doesn’t classify the self-employed as having jobs, although most people would probably think of them that way.
On a percentage basis, self-employment is even more of an issue in the real estate industry, where proprietor profits are several times larger than the wages and salaries generated. This is because realtor offices are conventionally organized as a group of independent contractors, who again don’t meet the government criteria for having jobs and earning wages.
Taxes and Other Forms of Government Revenue
The wages and salaries of workers shown in Table 1 are subject to federal, state, and sometimes local taxes. So are the profits of businesses, whether organized as proprietorships of corporations. Beyond this, many states collect sales taxes on material sold to home builders, and local jurisdictions typically charge fees for approving building permits and extending utility services.
The amount of tax and other revenue generated for governments by new residential construction is shown in Table 2.
At the federal level, income taxes include those paid by corporations, receivers of dividends from corporations, proprietors, and employees. Corporate income taxes paid and dividends are available by industry from the same series of BEA income and employment by industry tables shown in the above flow chart. Otherwise, federal income tax rates of 15.00% are applied to dividends, and 24.82% to proprietors income (which incorporates a downward adjustment because the self-employed component of social security taxes is deductible). Variable income tax rates are applied to wages and salaries, depending on the industry in which they’re earned, that averages to 8.689%.
Government social insurance paid by employers (which includes social security, Medicare, and unemployment insurance) is also available directly from the income and employment by industry tables. Rates of 7.65% and 15.30% are applied to wages and salaries and proprietors’ profits, respectively. Derivation of these rates is shown in the appendix.
The benchmark input-output tables also generate a category called taxes on production and imports (or TOPI) by industry. Most of this is sales and other taxes collected by state governments, but BEA’s government current receipts and expenditures tables show that 10.5% of TOPI is collected by the federal government—all either some form of excise tax or customs duty. Although, relatively small, this is included in Table 2 for completeness.
State and local income tax revenue is estimated as 27.6% of the federal amount in table 2, based on the same BEA government receipt tables. These tables are also used to separate state and local sales tax receipts from other forms of TOPI, primarily various types of licenses and non-residential property taxes (although TOPI includes all property taxes and estimate for the residential component was subtracted). Residential property taxes are not include in Table 2, because these are one-time revenue impacts realized roughly in the same year construction takes place, and there is uncertainty and local variation in the difference between residential vs. non-residential property tax rates and when the later on the full property value would kick in.
Finally, permit, hook-up and impact fees are estimated as 3.567% of a for-sale single-family house price from NAHB estimates described in a previous article. The same percentage is applied to estimate local construction-related fees for custom-built single-family homes and rental apartments. For remodeling, a straight 1.25% permit fee based on the cost of the remodeling project is used, based on conversations between NAHB Economics and Housing Policy staff and NAHB Remodelers.
This is the first time NAHB has updated its National Impact of Home Building estimates since 2008. For new construction, single-family or multifamily, the real estimated impacts—i.e., jobs—jobs per housing unit are approximately the same now as they were then. However, given the various assumptions that go into projecting construction value per home to the current year (explained in the appendix) along with the use of completely new federal estimates of what it takes to produce a dollar’s worth of construction, little should be read into this. The nominal impacts—wages, profits & taxes—are higher now than they were in 2008, but this is to be expected, given six years of general inflation, changes in house prices (partially attributable to changes in home sizes and amenities), plus a few changes in methodology designed to make the new estimates slightly more comprehensive.
For remodeling, the nominal effects per $100,000 are roughly the same in both years, but the number of jobs reported in the table is lower in 2014. Again, this is simply the result of inflation—$100,000 doesn’t buy quite as much of anything, including labor, in 2014 as it did in 2008.
For more information about this item, please contact Paul Emrath at 800-368-5242 x8449 or via email at email@example.com.