© Copyright 2004 by the Wyoming Department of Employment, Research & Planning

Forecasting Employment in Wyoming's Construction Industry

by: David Bullard, Senior Economist

Employment in Wyoming's Construction industry is highly seasonal, tending to peak in the late summer, then decline to a trough in February. In recent years, the seasonal employment peak has exceeded the trough by almost 5,000 jobs.

The Construction industry is very important to Wyoming’s economy for several reasons. First, it accounts for a larger part of our state’s economy than the U.S. average. In 2002, Construction employers provided 20,000 jobs in Wyoming or 8.1 percent of the state’s nonfarm employment, while only 5.2 percent of U.S. nonfarm employment was in Construction. Second, Construction employment has grown dramatically since 1990. From 1990 to 2002, the industry has added 7,500 jobs or 60.0 percent. In contrast, nonfarm employment grew about 25 percent during that same period. Finally, Wyoming’s Construction industry pays higher wages than the statewide average ($602 per week compared to the $563 average of all industries during second quarter 2003). For more information on wages and benefits see the Wyoming Wage Survey (Hauf, 2002) and the Wyoming Benefits Survey (Cowan, 2004) publications. This article briefly reviews the types of firms included in the Construction industry and then develops a statistical model to explain and predict monthly employment levels.

Employment in Wyoming’s Construction industry is highly seasonal. Employment tends to peak in the late summer (usually August), then declines to a trough in February. In recent years, the seasonal employment peak has exceeded the trough by almost 5,000 jobs.

The Construction industry has three main components or subindustries: construction of buildings (NAICS 236), heavy & civil engineering construction (237), and specialty trade contractors (238).

Construction of buildings includes both residential building construction (single family homes, apartment buildings, residential remodeling) and nonresidential building construction (industrial, commercial, and institutional buildings). This is the industry that includes many general contractors. In terms of Wyoming employment, construction of buildings is the smallest construction subindustry, providing 4,900 jobs in 2002.

Heavy & civil engineering construction firms build utility systems (including pipelines), highways, streets, and bridges. This industry accounted for 5,400 jobs in 2002.

Specialty trade contractors is the largest construction subindustry, with annual average employment of 9,800 in 2002. The subindustry includes firms involved in special trades such as framing contractors, roofing, electrical work, plumbing, painting, and flooring contractors. Often, these firms subcontract with the general contractors counted in construction of buildings.

The level of employment in heavy & civil engineering construction is influenced by federal highway spending, and the construction of pipelines and power plants. Heavy & civil engineering construction activity is highly irregular and hard to predict. Because the purpose of this article is to develop a model of construction employment that is predictable based on available monthly data (building permits, weather, etc.), heavy & civil engineering construction employment is excluded. Instead, the dependent variable consists only of construction of buildings and specialty trade contractors. This definition of construction is not overly influenced by large, infrequent construction projects such as pipelines or power plants. Also, employment levels in these two subindustries (construction of buildings and specialty trade contractors) tend to move together, because their firms often work on the same projects.

Data Model

We suggest that construction employment is largely a function of weather conditions in the state and home building activity.

The mean statewide temperature is readily available from the National Climatic Data Center (NCDC). From 1995 to 2002, Wyoming’s mean statewide monthly temperature ranged from 17.6 degrees Fahrenheit (February 1996) to 70.4 degrees (July 2002). In general, temperature follows a regular seasonal pattern, peaking in July and hitting its lowest point in February (NCDC, 2003).

Figure 1 shows temperature and Wyoming construction employment. The seasonal patterns are quite similar, suggesting that construction employment is higher in months with higher temperatures. The temperature variable also may serve as a proxy for the number of daylight hours each day, another important factor affecting construction work. Obviously, much construction work is difficult or impossible after dark or when temperatures are below freezing. Towards the end of the series, employment increases without a corresponding increase in temperature. This difference may be accounted for by an increase in construction activity unrelated to the weather.

The U.S. Census Bureau publishes estimates of residential building permits each month. For this model we use the number of permits issued for single-family homes. Other Census data include the total number of housing units authorized, reflecting the number of apartments and other multi-family housing units. The number of overall units is much more volatile than the single-family home series, as apartments tend to be built infrequently and in large complexes. The monthly data series begins with January 1995, which is used as the beginning of our modeled time series (U.S. Census Bureau, 2003).

Obtaining a building permit is one of the first steps in building, and construction work often stretches on for months after the issuance of the permit. Because of this, we include lags of the permit data in our model. Figure 2 shows permits for single-family homes and construction employment in Wyoming. Especially in earlier years, the lag between permitting and employment is noticeable. As with the temperature data in Figure 1, employment increases in later years without a corresponding increase in permits. Two possible scenarios could help explain the difference between employment and permits toward the end of the series. As Wyoming’s housing stock ages, a higher proportion of construction employment could be associated with remodeling work, which is not included in the census permit data. Alternatively, an increase in commercial construction could skew the results, as it is not included in the census data.

Results

We use Ordinary Least Squares (OLS) regression to estimate the effect of changes in temperature and building permits on construction employment in Wyoming. Linear regression is a commonly used statistical technique in which researchers are able to estimate the effect of one independent variable on a dependent variable, while holding the other independent variables constant. The Table summarizes results of the regression model. The adjusted R2 is 0.638, suggesting that the model explains over three-fifths of the over-the-month change in construction employment.

The results of the model indicate that an increase of one degree Fahrenheit temperature will be associated with an employment increase of 10.4 jobs. For example, in a typical year, the average temperature will increase from 40.5 degrees in April to 50.4 degrees in May. Holding building permits constant, this temperature increase would be associated with an employment increase of 103.0 jobs.

The issuance of a permit to build a home is associated with 5.4 construction jobs that month. The next month, it is associated with an additional 3.4 jobs. Three months after the permit is issued, employment decreases by an estimated 7.7 jobs. A brief example will illustrate the effect of permits on employment across a few months. Suppose 100 permits were issued to build single-family homes in May. Holding temperature constant, we would expect construction employment to increase by 540 jobs in May, 340 jobs in June, and then fall by 770 jobs in August. Of course, permits are issued each month, so construction employment in any given month is a function of the current temperature, as well as the permits issued during the previous three months.

Figure 3 shows the actual change in construction employment compared to the predicted changes for January 2001 through June 2003. The predicted changes do not track perfectly with the actual employment changes, but they do exhibit the same general pattern.

Discussion

Our model suggests that construction employment in Wyoming has a positive relationship with temperature and building permits. In particular, employment rises during the month the permit is issued, the succeeding month, and then falls the third month following issuance of the permit. Results using actual data from 1995 through 2002 show that the model has significant predictive power.

Of course there are many other factors influencing construction activity and employment. Building permits themselves are a function of long-term interest rates and population and income growth. Population growth in Wyoming is largely driven by the relative strength of our economy compared to other states. When our economy is growing rapidly and other states are not (as in the early 1980s), net in-migration provides demand for new housing stock. Construction employment can even be affected by court decisions, as seen in the Wyoming supreme court ruling regarding school capital construction. Each of these areas represents a potential direction for new research.

References

Cowan. C. (2004, January 12) Employee benefits in Wyoming: 2002. Retrieved February 3, 2004 from http://wydoe.state.wy.us/lmi/benefits/2002BenefitsPub/Ben2002toc.htm 

Hauf. D. (2002, December). 2001 Wyoming wage survey. Retrieved February 3, 2004 from
http://wydoe.state.wy.us/lmi/01oespub/toc.htm

National Climatic Data Center. (2004, January 5). U.S. climate at a glance. Retrieved January 5, 2004 from http://www.ncdc.noaa.gov/oa/climate/research/cag3/cag3.html

U.S. Census Bureau. (2003, December 23). Housing units authorized by building permits. Retrieved January 5, 2004 from http://www.census.gov/const/www
 

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