Victorian construction labour costs and productivity

Victorian construction labour costs and productivity Master Builders Association of Victoria Final report 4 December 2014

Contents Glossary... i Executive Summary... i 1 Introduction... 1 2 The economic context... 2 2.1 The Australian economy... 2 2.2 The Victorian economy... 4 2.3 The Victorian construction sector... 6 3 Analysis of Victorian construction sector EBA outcomes... 14 3.1 Wage growth in Victorian EBAs... 14 3.2 Comparisons with other wage outcomes... 20 4 The impact of labour costs on construction... 35 4.1 Labour costs and construction prices... 35 4.2 Labour and capital share of total factor income... 38 4.3 The impact of wages growth on the Victorian construction industry... 43 5 Productivity in the Victorian construction industry... 50 5.1 Construction productivity in Australia... 50 5.2 Construction productivity in Victoria... 53 6 Profitability in the construction sector... 57 6.1 Construction profitability in Australia... 57 6.2 Construction profitability in Victoria... 61 7 Restrictive working arrangements... 67 7.1 Working arrangements in the construction industry... 67 7.2 Flexible RDOs... 69 7.3 Inclement weather provisions and other restrictions... 69 7.4 Victorian code of practice... 70 8 The financial impact of working days lost... 73 8.1 Industrial disputes... 73 9 Comparison of construction costs with other jurisdictions... 79 10 The backdrop for the forthcoming EBA negotiations... 82 Appendix A : Analysis of EBAs and awards... 85 References... 87 Limitation of our work... 89 Liability limited by a scheme approved under Professional Standards Legislation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. 2015 Pty Ltd

Charts Chart 2.1 : Business investment and the unemployment rate... 3 Chart 2.2 : Engineering construction as a share of GDP (%)... 4 Chart 2.3 : Ratio of Victorian to national employment shares, 2013-14... 5 Chart 2.4 : Victoria as a share of national totals... 6 Chart 2.5 : Industry shares of the economy and employment in Victoria, 2013-14... 7 Chart 2.6 : Construction as a share of the economy (%), Victoria... 8 Chart 2.7 : Employment in construction as a share of total employment (%), Victoria... 9 Chart 2.8 : Growth in construction employment, Victoria... 10 Chart 2.9 : Share of total construction employment covered by EBAs in Victoria... 11 Chart 2.10 : Private sector expenditure on construction as a share of GSP (%), Victoria... 12 Chart 2.11 : Victorian private sector expenditure on construction as a share of the national total (%)... 13 Chart 3.1 : Average annual wage growth in construction industry EBAs... 15 Chart 3.2 : Average annual wage growth in construction industry EBAs... 16 Chart 3.3 : Construction industry EBA wage growth at the 2 digit ANZSIC level, Victoria... 17 Chart 3.4 : Comparison of annual wage levels between CFMEU Industry EBA and Desalination Agreement... 20 Chart 3.5 : National construction sector EBAs compared with award wage increases... 21 Chart 3.6 : Specific EBA wage outcomes for a carpenter comparison with award wages... 22 Chart 3.7 : Specific EBA wage outcomes for an unskilled labourer comparison with award wages 23 Chart 3.8 : Contribution to changes in remuneration under EBAs and Award by type of entitlement... 24 Chart 3.9 : Contribution to overall increase in remuneration under EBAs from 2000 to 2014 by type of entitlement... 25 Chart 3.10 : Average annual earnings of full-time non-managerial employees by occupation in Victoria, 2012... 26 Chart 3.11 : Average hourly earnings of full-time non-managerial employees by occupation in Victoria, 2012... 27 Chart 3.12 : Average annual growth in base wage rates by State, 1 July 2000 to 1 July 2014 (%, p.a.) 29 Chart 3.13 : Comparison of national construction EBA outcomes with ABS wage measures... 30 Chart 3.14 : The national EBA wage gap growth in EBA wages minus growth in WPI... 31 Chart 3.15 : The national EBA wage gap across industries... 32 Chart 3.16 : EBA wage gaps in the construction industry... 33

Chart 3.17 : CPI-adjusted wage outcomes for Victorian construction EBAs, Victorian construction WPI, Victorian all industries WPI and Victorian construction awards... 34 Chart 4.1 : The relative price of labour compared with the price of construction work done, Victoria and Australia... 36 Chart 4.2 : The relative price of labour under EBAs compared with the price of non-residential construction work done, Victoria and Australia... 37 Chart 4.3 : The relative price of labour compared with the price of construction services in Victoria... 38 Chart 4.4 : Labour share of total income across all market sector industries (%), Australia... 39 Chart 4.5 : Labour share of income in the construction industry (%), Victoria... 40 Chart 4.6 : Capital share of income in the construction industry (%), Victoria... 41 Chart 4.7 : Employees share of income in the construction industry (%), Victoria... 42 Chart 4.8 : Labour share of income in the construction industry by State (%)... 43 Chart 4.9 : Labour costs as a share of total costs... 45 Chart 5.1 : Labour productivity in the construction and market sectors, Australia... 51 Chart 5.2 : Construction labour productivity, Victoria and Australia... 54 Chart 5.3 : Labour productivity in the construction and market sectors, Victoria... 55 Chart 6.1 : Operating profit margin by industry, Australia, 2012-13... 59 Chart 6.2 : Operating profit margins in the broader construction industry (%), Australia... 59 Chart 6.3 : Construction industry s share of all external administration reports lodged... 61 Chart 6.4 : Indicative profit margins in construction by State (%), 2011-12... 63 Chart 6.5 : Construction companies entering external administration in 2013-14, by State... 64 Chart 6.6 : Share of all companies entering external administration by industry in 2013-14, Victoria... 65 Chart 6.7 : Initial external administrators reports for the Victorian construction industry... 66 Chart 8.1 : Working days lost due to industrial disputes per thousand employees across all industries, Victoria and Australia... 75 Chart 9.1 : Price indices for all construction work done, Victoria and Australia... 79 Tables Table 2.1 : Employment in the construction industry in 2013-14, Victoria... 9 Table 3.1 : Base wage rate for CW1 Labourer by State ($/hr)... 28 Table 3.2 : Base wage rate for CW3 Carpenter by State ($/hr)... 28 Table 4.1 : Employment elasticity estimates... 44 Table 4.2 : The impact of higher labour costs on building costs in Melbourne ($/m2)... 48

Table 5.1 : Value added per worker employed in the construction industry ($ thousands), Australia... 52 Table 5.2 : Estimated average annual rates of MFP growth in the construction industry, by State and Territory (%)... 56 Table 6.1 : Profitability of largest Australian non-residential construction firms, 2008-09 to 2012-13... 58 Table 6.2 : Profitability of largest non-residential construction firms domiciled in Victoria, 2008-09 to 2012-13... 62 Table 7.1 : Direct effects of work hours and hiring arrangements on workplace performance. 68 Table 8.1 : Working days lost due to industrial disputes per thousand employees in the construction industry, calendar year, Victoria and Australia... 75 Table 9.1 : Average growth in prices of non-dwelling construction work done by State (% p.a.)80 Table 9.2 : Average growth in prices of non-residential building work done by State (% p.a.). 80

Glossary AAWI ABCC ABS ACCC ACTU AWE AWOTE CFMEU CPI EBA EEH FWBC GDP GFC MBAV MFP NSW OECD PC PLD QLD RDO TRYM VIC WA WPI Average Annualised Wage Increase Australian Building and Construction Commission Australian Bureau of Statistics Australian Competition and Consumer Commission Australian Council of Trade Unions Average Weekly Earnings Average Weekly Ordinary Time Earnings Construction, Forestry, Mining and Energy Union Consumer Price Index Enterprising Bargaining Agreement ABS Survey of Employee Earnings and Hours Fair Work Building and Construction Gross Domestic Product Global Financial Crisis Master Builders Association of Victoria Multifactor productivity New South Wales Organisation for Economic Co-operation and Development Productivity Commission Productivity Leisure Day Queensland Rostered Day Off Treasury Macroeconomic Model Victoria Western Australia Wage Price Index

Executive Summary has been commissioned by Master Builders Association of Victoria (MBAV) to undertake independent research across a range of issues relating to the Victorian construction industry. The areas of focus include wages under enterprise bargaining agreements (EBAs), construction costs, productivity and profitability in the industry, flexible working arrangements, industrial disputes and competitiveness issues. The economic context Australia saw a strong economic performance over the past decade on the back of a resources investment boom which drove engineering construction to record highs. The rapid growth in construction demand for major projects created an environment where rapid wage gains in construction could occur. However, the Australian economy now faces challenges as the level of resource-related construction winds down notably. The Victorian economy also performed well over the past decade, although it was far less exposed to resource-related construction. Victoria s construction sector grew, primarily driven by housing construction on the back of solid population growth. Non-residential building activity was particularly badly hit during and after the GFC, while engineering construction has been growing at around the same pace as the rest of the State economy. Wage growth under Victorian construction EBAs Despite Australia s historic resources investment boom being centred outside of Victoria, wage gains in the Victorian construction industry have generally exceeded the wage gains seen in the national construction industry in recent years. Victorian construction workers under EBAs have achieved wage gains some 15% greater than the national average for EBAs over the period since 2000. Further, wage outcomes under Victoria s construction sector EBAs have outpaced the WPI for the Victorian construction sector by some 28% since 2000. The outperformance of EBA wages in the Victorian construction sector is made clear by the comparison presented in Chart i, with Victorian average wage growth from 2000 to 2014 well ahead of all other States. The fast pace of construction sector EBA wage growth in Victoria reinforces wage levels for Victorian construction workers which are already high relative to other benchmarks. As at 30 June 2014, both carpenters and basic unskilled labourers earned more than double under the EBA for a 51 hour work week than under the award. On an hourly basis, carpenters and unskilled construction labourers under an EBA earn more than an engineer. Both unskilled labourers and carpenters earn far more per hour than do nurses, accountants, police or teachers. Within Victoria, construction sector EBAs involving the CFMEU have tended to see higher rates of wage growth than those involving other unions or no unions. These wage growth i

trends through EBAs seem unrelated to the state of demand in the broader economic environment. Victorian EBA wage growth has exceeded that seen in WA and Queensland over a period of time when those States experienced a major resources construction boom. Chart i: Average annual wage growth in construction industry EBAs VIC Australia ACT QLD SA TAS NT NSW WA 4.0% 4.5% 5.0% 5.5% 6.0% Source: Department of Employment Workplace Agreement Database, The impact of labour costs on construction Average of AAWI - 2000 to 2014 (% p.a.) Wage rises in the construction industry have outpaced rises in the prices charged for construction work done in both Australia and Victoria in recent years. The discrepancy has been much larger in Victoria than nationally. The rise in construction wages has outpaced rises in the price of construction work done by around 15 percentage points in Victoria since the start of 2009. The discrepancy has also been more pronounced for labour under construction EBAs and for non-residential construction. Higher labour costs eventually mean higher construction costs for buildings such as offices, hotels, shops, schools and hospitals, and also place upward cost pressure on the Victorian Government s infrastructure budget. In turn, these costs to private businesses and to taxpayers fall in part on Victorian families. In this way, the broader public also help to fund large wage rises seen in the construction industry. ii

Productivity Nationally, there have been improvements in labour productivity in the construction industry over the last two decades, with the increase in labour productivity in construction broadly just matching the market sector as a whole over this time. However, labour productivity growth in the Victorian construction industry has lagged behind the growth in labour productivity seen in the national construction industry. It has also lagged behind labour productivity growth in other industries in Victoria. Real unit labour costs, a measure of the real cost to employers of employing a construction worker after adjusting for productivity, have increased by 1.6% per year from 1999-00 to 2013-14 for the broader measure of construction sector WPI wage growth. For workers under the CFMEU Industry EBA, real unit labour costs have increased by 2.4% per annum. Over more than a decade, that is a very substantial increase in the real (inflation-adjusted) cost of employing labour in the construction industry, driven by high wage growth in the face of modest productivity growth. Profitability Nationally, profit margins have been falling in all sectors of the construction industry in recent years. Victoria s profit margins were lower than the national average in 2011-12, dragged down by losses in heavy and civil engineering construction. For non-residential construction firms domiciled in Victoria, not only are profit margins thin, but the return on assets is also extremely low just 2.5% in 2011-12 and 3.6% in 2012-13. To put this into perspective, an Australian Government 10 year bond currently yields around 3.5% per annum and a one year term deposit with an Australian bank currently pays around 3.3% per annum. Yet these are essentially risk-free investments, whereas an investment in a construction business entails significant risk. In effect, the owners of construction businesses in Victoria would currently be equally well off if they could sell up their businesses for their book value, and simply put that money in the bank. Such a situation is not sustainable without an improvement in the profitability of firms. Working arrangements The use of flexible working arrangements, such as the option to work variable work hours or having choice around the timing of rostered days off, has been widely acknowledged as having the potential to lower costs and raise productivity in the construction industry. Flexibility is also important to many workers who may have different preferences depending on their home and other commitments. Yet Victoria s RDO system and working arrangements have at times been particularly inflexible when compared to other States. The Victorian Government has released a new iii

Code of Practice for the building and construction industry in Victoria which all tenderers for Victorian Government construction work will need to be compliant with. The Federal Government has also released a new code of practice for the construction industry, although it is yet to pass the Senate. These codes have the potential to improve working arrangements and flexibility in the industry. Working days lost Working days lost to industrial disputes in the construction industry have fallen over the past three decades. That has also been the case in Victoria, although this State has tended to consistently experience a higher rate of working days lost than the national average. The financial costs associated with disputes can be especially large for individual projects. As a result, some constructors make allowance in their budgets for industrial relations risk. Companies may also agree to large wage increases in EBAs as well as inflexible, non-productive work practices outside of the EBA simply so as to reduce the future risk of industrial disputation. For these reasons, the financial costs associated with industrial disputes (and the risk of future industrial disputes) will be significantly higher than indicated by estimates of the direct financial cost of working days lost. Conclusions With the mining boom rapidly cooling, wage restraint is now being seen across the Australian economy including the construction industry. EBA negotiations in Western Australia look like delivering a sizeable cut in construction wages. Yet despite Victoria having very little exposure to resources construction boom of recent years, the rise in construction wages under CFMEU EBAs in Victoria has more than matched the equivalent rise in construction wages in Western Australia and Queensland since 2000. Victorian EBA construction wages are high relative to a range of benchmarks, and wage growth continues at the very upper end of wage gains seen across the economy. That long period of wage gains in Victoria, when demand for construction services has not been that strong, is now taking a toll on the Victorian construction industry: The labour income share in the Victorian construction industry has been rising, while the capital income share has been falling. Large constructors profit margins are extremely thin and their return on assets is not much better than government bond yields. Such a low return is unsustainable for businesses which take on significant risk in their normal project operations. Demand for the overall Victorian construction sector over the next few years may be relatively subdued. Victoria s success in recent years in keeping new housing activity continuing at a solid pace may well count against it over the next two years other States are rapidly ramping up their residential construction, while building approvals data through 2014 suggests Victoria may see much less of a lift. With a relatively subdued demand outlook, and having absorbed significant wage increases in recent years, the sustainability of Victoria s construction sector suggests that wage growth over the next few years needs to remain well contained, with a renewed focus on iv

productivity improvements through greater flexibility in working arrangements including more flexible RDO arrangements which are widely acknowledged as having the potential to lift productivity in the construction industry. v

1 Introduction has been commissioned by Master Builders Association of Victoria (MBAV) to undertake independent research across a range of issues as they relate to the Victorian construction industry. The areas of focus include wages under enterprising bargaining agreements (EBAs), construction costs, productivity and profitability in the industry, flexible working arrangements, industrial disputes and competitiveness issues. The current EBA with the CFMEU governing the terms and conditions of employment in Victoria s building construction industry is due to conclude in March 2015. This report seeks to provide evidence in relation to a range of relevant issues as the industry undertakes negotiations on a new EBA. has utilised a range of publicly available information and our own analysis in compiling this report. In addition, also asked MBAV members to respond to a questionnaire focusing on a range of these cost and productivity issues. Responses to the questionnaire are used within this report to supplement the analysis. Individual responses have been de-identified. The remainder of this report is structured as follows: Chapter 2 provides an overview of the economic conditions which have influenced developments in the construction industry in recent years and also provides a profile of the Victorian construction industry; Chapter 3 examines wage growth in EBAs in the Victorian construction industry in light of broader State and national wage growth trends; Chapter 4 provides a comparison of labour costs and construction costs and also examines the distribution of income earned in the construction industry and the implications of rising wages for employment numbers and construction costs; Chapter 5 takes a detailed look at developments in productivity growth within the construction industry; Chapter 6 provides an overview of profitability in the Australian and Victorian construction industries; Chapter 7 considers the use of flexible working arrangements in the construction industry and the implications for efficient project delivery; Chapter 8 considers the financial costs of working days lost due to industrial disputes; Chapter 9 compares construction costs in Victoria with interstate jurisdictions; and Chapter 10 concludes the report by drawing together recent trends for the Victorian construction sector within the current economic context. 1

2 The economic context This chapter examines economic conditions in Australia and Victoria, including recent trends. It also provides an overview of the Victorian construction industry. Australia experienced a strong economic performance over the past decade on the back of an historic resources investment boom which drove engineering construction to record highs. The rapid growth in construction demand for major projects created an environment where rapid wage gains in construction could occur. However, the Australian economy now faces challenges as the level of resource-related construction winds down notably. The Victorian economy also performed well over the past decade. However, Victoria has been far less exposed to resource-related construction. Victoria s construction sector has expanded, primarily driven by housing construction on the back of solid population growth. Non-residential building activity was particularly badly hit during and after the GFC, while engineering construction activity has been growing at around the same pace as the rest of the State economy. Despite Australia s historic resources investment boom being centred outside of Victoria, wage gains in the Victorian construction industry have generally exceeded the wage gains seen in the national construction industry in recent years. 2.1 The Australian economy Over the last decade, Australia s economic performance was among the best of the advanced economies. On the back of the rise in economic growth in China and other emerging economies and the corresponding rise in demand for raw materials, investment in Australia s resources sector experienced an historic boom. That rise in investment provided the foundation for Australia s economic growth. Chart 2.1 below shows the extent to which overall business investment activity increased over the last decade, along with trends in the unemployment rate. As a share of total economic activity, business investment in Australia doubled over the last decade, while the unemployment rate recorded a steady decline over much of the 2000s until the GFC. 2

Chart 2.1: Business investment and the unemployment rate 20% 16% 12% 8% 4% 1986 1990 1994 1998 2002 2006 2010 2014 Underlying business investment: ratio to GDP Unemployment rate Source: Australian Bureau of Statistics, Chart 2.2 drills down further to show the two construction-related components of business investment. Resource-related investment has helped to drive engineering construction to record highs. Engineering construction was the equivalent of 7.1% of Australia s GDP at the end of 2012, a stunning rise from 1.9% of GDP a decade earlier. 3

Chart 2.2: Engineering construction as a share of GDP (%) 8% Share of GDP (%) 7% 6% 5% 4% 3% 2% 1% 0% 1986 1990 1994 1998 2002 2006 2010 2014 Engineering construction Source: ABS Cat No. 5206, The end result was that at its peak one in every eleven workers was employed in the construction industry a record high not just for Australia, but for any developed nation. The surge in construction work also meant that most of Australia s economic growth through 2010 and into 2011 was due to business investment spending. Yet, Australia now faces challenges as resource-related construction winds down following the completion of major projects. There has already been a slowing in the pace of growth in the domestic economy and the unemployment rate has been drifting upwards. 2.2 The Victorian economy Victoria s economy also performed strongly over the last decade. Non-residential building Yet, the drivers of Victoria s growth were different to the national economy, reflecting differences in Victoria s industrial structure. Chart 2.3 ranks the relative intensity of employment in Victorian industries against that seen nationally. If an industry ranks above the 100% line, it accounts for a relatively higher share of the State employment base compared to nationally. 4

Chart 2.3: Ratio of Victorian to national employment shares, 2013-14 Manufacturing Wholesale Trade Agriculture, Forestry and Fishing Information Media and Telecommunications Financial and Insurance Services Professional, Scientific and Technical Arts and Recreation Services Education and Training Retail Trade Health Care and Social Assistance Administrative and Support Services Electricity, Gas, Water and Waste Services Transport, Postal and Warehousing Construction Accommodation and Food Services Other Services Rental, Hiring and Real Estate Services Public Administration and Safety Source: ABS, Mining 0% 50% 100% 150% As Chart 2.3 shows, Victoria has a high share of its workers employed in manufacturing, wholesale trade, education and training, property services and finance compared to the national average. It has a low exposure to mining as Victoria has relatively few mining projects compared to the States in Australia s north and west. As such, the historic rise in resources investment which powered Australia s economy over the last decade had a much more direct impact on the demand for construction workers in the resource-rich States Western Australia and Queensland than was true in Victoria. In addition, the State s industrial structure left Victoria more exposed to some of the negatives associated with the resources boom relatively high interest rates and the high $A which took a heavily toll on manufacturing. The manufacturing sector suffered a series of redundancies and offshoring decisions by a range of companies, with the State s car manufacturing industry one of the most high profile recent casualties. Yet, Victoria s economy has performed quite well despite those challenges. In part, that was due to demand from the resource rich States in areas such as business services, while the State s economy also benefited more broadly from the favourable conditions seen nationally. However, there have also been Victoria-specific factors at work, including strong population growth, with the State being the largest source of population growth in the country. The latter has supported all industries in the State, but particularly construction, which was a key driver of the State s economic performance over the last decade. 5

In particular, housing construction has been a standout performer for the State. Indeed, Victoria has been Australia s number one State in terms of house building for nearly a decade. Chart 2.4: Victoria as a share of national totals 26% % of national total 25% 24% Output Population 23% 22% 21% 1992-93 1996-97 2000-01 2004-05 2008-09 2012-13 Source: ABS, As shown in Chart 2.4, Victoria has maintained a solid share of Australia s population over the last decade, with a slight fall in its share of output largely reflective of the strength seen in resource-rich Queensland and Western Australia. As such, the economic backdrop was also favourable in Victoria, which also helped to support labour market conditions in the State. 2.3 The Victorian construction sector 2.3.1 Industry profile The construction industry is one of the most important industries in Victoria as measured by both contributions to State output (i.e. Gross State Product or GSP) and total State employment. Chart 2.5 shows the contributions each industry makes to output and employment in Victoria. 6

Chart 2.5: Industry shares of the economy and employment in Victoria, 2013-14 Arts and recreation services Other services Mining Accommodation and food services Agriculture, forestry and fishing Administrative and support services Electricity, gas, water and waste services Rental, hiring and real estate services Information media and telecommunications Public administration and safety Transport, postal and warehousing Wholesale trade Education and training Retail trade Construction Health care and social assistance Manufacturing Professional, scientific and technical services Financial and insurance services GSP Employment 0% 2% 4% 6% 8% 10% 12% 14% Source: ABS Cat No. 5220, ABS Cat No. 6291.0.55.003, The construction industry accounted for 6.3% of State output and 8.5% of State employment in 2013-14. This made the construction industry the fifth largest contributor to both State output and State employment in 2013-14. Chart 2.6 shows that the construction industry has increased its share of the State s economy over the past two decades. Over the past decade, its share of the economy has averaged around 6% while in the 1990s the construction industry averaged around 5%. In other words, the construction industry has grown faster than the State average for all other industries over time. 7

Chart 2.6: Construction as a share of the economy (%), Victoria 8% Share of GSP (%) 7% 6% 5% 4% 3% 1992-93 1995-96 1998-99 2001-02 2004-05 2007-08 2010-11 2013-14 Source: ABS Cat No. 5220, Chart 2.7 shows that the construction industry s contribution to employment in Victoria has increased by an even greater margin over time. Around 1 in every 12 workers in the State (or around 8.5% of employment) worked in the construction industry in 2013-14, compared with around 6.0% two decades ago. The contribution to full time jobs is even higher. Almost 1 in every 9 full-time workers (or around 10.7%) worked in the construction industry in 2013-14. That figure has also risen appreciably, from around 6.6% two decades ago. Table 2.1 outlines the sectoral distribution of employment within the construction industry according to the ABS industrial classifications. As the table shows, the majority of workers in the construction industry were employed in Construction Services (68%). These workers are typically subcontractors or work for subcontractors, providing specialist construction services to other parts of the construction industry. In addition, around 6% of all construction workers were specifically employed in Engineering Construction, and 24% in total were specifically employed in Building Construction (10% specifically in Residential Building and 4% specifically in Non-Residential Building, with the remainder undefined). 8

Chart 2.7: Employment in construction as a share of total employment (%), Victoria 12% 10% 8% 6% 4% Construction share of full time employment Construction share of total employment 2% 1992-93 1995-96 1998-99 2001-02 2004-05 2007-08 2010-11 2013-14 Source: ABS Cat No. 6291.0.55.003, Table 2.1: Employment in the construction industry in 2013-14, Victoria Employed Full-Time Employed Part-Time Total Employed Share of total construction Residential Building 20,075 3,325 23,400 10% Non-Residential Building 9,525 525 10,050 4% Building Construction, nfd 21,125 3,075 24,200 10% Building Construction 50,700 6,900 57,600 24% Heavy and Civil Engineering 14,175 1,625 15,800 6% Construction Construction Services, nfd 1,300 250 1,550 1% Land Development and Site 11,400 2,125 13,525 6% Preparation Services Building Structure Services 15,875 3,475 19,350 8% Building Installation Services 58,175 8,300 66,475 27% Building Completion Services 37,625 5,025 42,650 17% Other Construction Services 16,350 6,400 22,750 9% Construction Services 140,700 25,600 166,300 68% Construction, nfd 3,650 1,150 4,800 2% Construction 209,250 35,275 244,525 100% Source: ABS Cat No. 6291.0.55.003 (Data cube E06). nfd = not further defined. Another notable feature of employment in the construction industry is the large number of independent contractors and subcontractors. Nationally, the share of all employed persons who were owner-managers of either incorporated or unincorporated businesses in the 9

construction industry was 37% in 2013, a high proportion although down from 49% in 1994. 1 The ABS separately reports that the proportion of independent contractors was 29.7% of all employment in the national construction industry in 2013. 2 Chart 2.8 shows that employment growth in Victorian Residential Building has been stronger over time than in Non-Residential Building, with employment in the latter largely flat over the past decade having fallen markedly since 2008-09. However, employment in Construction Services has shown the strongest growth of all the sub-sectors within Construction. Chart 2.8: Growth in construction employment, Victoria 250 Index, 1991-92 = 100 200 150 100 50 0 1991-92 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10 2012-13 Residential Building Heavy and Civil Engineering Non-Residential Building Construction Services Source: ABS Cat No. 6291.0.55.003 (Data cube E06). The fact that workers in Construction Services may provide services to any of the three main construction segments (residential, non-residential building, and engineering construction), means that it is difficult to identify with precision the total number of people working in each of those segments. This is a limitation of the current ABS industrial classification. The Productivity Commission has recently made recommendations to improve the construction industry classification for this reason (PC, 2014). An additional indication of the size of the non-residential construction workforce in Victoria is provided by the number of employees covered under Federal Enterprise Bargaining Agreements. analysis of the Federal Government s Department of Employment Workplace Agreements Database suggests that there were around 40,287 construction workers under such agreements in Victoria in 2013-14. 1 ABS Cat No. 6105. 2 ABS Cat No. 6359. 10

Chart 2.9: Share of total construction employment covered by EBAs in Victoria 35% 30% 25% 20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: ABS Cat No. 6291.0.55.003, Department of Employment Workplace Agreements Database, Deloitte Access Economics Chart 2.9 shows that the share of all construction workers covered by Federal EBAs is currently around 16% in Victoria. This includes EBAs for firms in the Building Construction, Heavy and Civil Engineering Construction and Construction Services segments of the industry. Construction Services is the dominant sector in terms of workers covered by EBAs, consistently accounting for around 80% of all workers covered by EBAs in Victoria over time. Heavy and Civil Engineering is only a small segment, although the extent to which workers covered by EBAs in the Construction Services sector service the Heavy and Civil Engineering segment is not known. The large falls in the share of construction workers covered by EBAs at regular intervals in Chart 2.9 coincide with the expiry dates of the CFMEU Industry EBA for the non-residential building sector in Victoria. For example, the previous CFMEU Industry EBA expired at the end of March 2011. Excluding the Heavy and Civil Engineering sector, which is not covered by the CFMEU Industry EBA, the number of workers under EBAs fell by around 23,500 (or around 10% of all construction employment) at this time. 2.3.2 Recent developments Recent years have seen particular strength within the housing construction segment of the construction industry in Victoria. This strength has been underpinned by strong population growth in this State relative to the rest of Australia. Chart 2.10 shows that residential building in Victoria has been growing faster than the rest of the State s economy in recent years, carving out a larger share of the overall economy. 11

Chart 2.10: Private sector expenditure on construction as a share of GSP (%), Victoria 8% 6% 4% 2% 0% 1992-93 1995-96 1998-99 2001-02 2004-05 2007-08 2010-11 2013-14 Residential building Non-residential building Engineering construction Source: ABS Cat No 5220, In contrast, private sector commercial construction activity has been relatively subdued. Non-residential building activity was particularly badly hit during and after the GFC, while engineering construction activity has been growing at around the same pace as the rest of the State economy. However, construction work for the public sector has helped to offset these developments in the private sector, with the Federal Government s fiscal stimulus following the GFC supporting activity levels in non-residential building and some large State Government projects such as the Wonthaggi desalination plant supporting engineering construction activity. Chart 2.11 shows construction-related expenditure in Victoria as a share of the national total. Housing construction in Victoria has strongly outperformed the rest of the nation in recent years. In contrast, the huge rises in mining-related engineering construction activity in WA and Queensland have meant that those States and the nation as a whole have seen much stronger growth in engineering construction work than Victoria in recent years. Non-residential building has also slightly underperformed in Victoria relative to the national average since the GFC. 12

Chart 2.11: Victorian private sector expenditure on construction as a share of the national total (%) 35% Share of national total (%) 30% 25% 20% 15% 10% 5% 0% 1992-93 1995-96 1998-99 2001-02 2004-05 2007-08 2010-11 2013-14 Residential building Non-residential building Engineering construction Source: ABS Cat No 5220, These developments provide important context for labour market developments within the construction industry. The demand for workers in the residential building segment of the industry has been stronger in Victoria than nationally in recent years. In contrast, it is clear that the demand for workers in non-residential construction has been far stronger outside of Victoria, underpinned by the resources investment boom. Yet despite Australia s historic resources investment boom being centred outside of Victoria, wage gains in the Victorian construction industry have generally exceeded the wage gains seen in the national construction industry in recent years. The next chapter provides further discussion of those wage gains, particularly under EBAs. 13

3 Analysis of Victorian construction sector EBA outcomes This chapter examines wage growth in EBAs in the Victorian construction sector in light of broader State and national wage growth trends. For most sectors the wage growth recorded under EBAs has tended to be faster than equivalent broader wage measures such as the Wage Price Index. For the construction sector, this differential has been the most stark, and it has been more pronounced in Victoria than nationally. Victorian construction workers under EBAs have achieved wage gains some 15% greater than the national average for EBAs over the period since 2000. Further, wage outcomes under Victoria s construction sector EBAs have outpaced the WPI for the Victorian construction sector by some 28% since 2000. The fast pace of construction sector EBA wage growth in Victoria reinforces wage levels for Victorian construction workers which are already high relative to other benchmarks. As at 30 June 2014, both carpenters and basic unskilled labourers earned more than double under the EBA for a 51 hour work week than under the award. On an hourly basis, unskilled construction labourers under an EBA earn about the same as an engineer, while a carpenter earns more. Both unskilled labourers and carpenters earn far more per hour than nurses, accountants, police or teachers. Within Victoria, construction sector EBAs involving the CFMEU have tended to see higher rates of wage growth than those involving other unions or no unions. These wage growth trends through EBAs seem unrelated to the state of demand in the broader economic environment. Victorian EBA wage growth has exceeded that seen in WA and Queensland over a period of time when those States have experienced a major resources construction boom. 3.1 Wage growth in Victorian EBAs As part of its role in administering industrial relations arrangements, the Federal Department of Employment collects information on all federal collective agreements. From this database, has obtained a detailed listing of all federally certified construction sector EBAs since 2000. This data allows the calculation of annual wage inflation as measured by the Average Annualised Wage Increase (AAWI) per employee for the construction industry s EBAs since 2000, including in Victoria. 14

The AAWI measure is calculated for agreements that provide quantifiable wage increases over the life of the agreement. It allows for examination of wage increases across all EBAs certified in the construction sector but examines only increases to the base rate of pay, and does not take into account allowances and other payments such as bonuses that are paid separate to the base wage. Increases in allowances and other on-costs for construction workers are considered in more detail in the next section. Chart 3.1 compares wage outcomes from EBAs in Victoria with the national average. It shows the average annual wage increase (AAWI) for all federally certified EBAs covering the construction sector in Victoria which were in force at the commencement of the quarter indicated. Consistent with the methodology applied by the Department of Employment, agreements with a zero AAWI are excluded from the averages presented here. Chart 3.1: Average annual wage growth in construction industry EBAs 7% AAWI (%) 6% 5% 4% 3% 2000 2002 2004 2006 2008 2010 2012 2014 Victoria Rest of Australia Australia Source: Department of Employment Workplace Agreement Database, Chart 3.1 shows a substantial gap between Victorian wage outcomes and their national counterparts over time, with Victorian construction workers achieving wage gains some 15% higher than the national average over the period since 2000. With Victoria accounting for around 43% of all Australian construction workers covered by EBAs, a comparison with EBA wage outcomes in other States further highlights that outperformance. As shown in Chart 3.1 above, the stronger wage outcomes for Victoria have pushed up the national average, with lower wage outcomes seen in agreements for the rest of Australia. 15

Victorian construction workers have achieved wage gains a cumulative 26% higher than construction workers outside of Victoria over the period since 2000. Indeed, all other States and Territories saw EBA wage gains over the fourteen year period considered here which were lower than the national average (with the latter heavily influenced by Victorian wage outcomes). On average, wages under Victorian EBAs grew 0.7 percentage points faster than those in Queensland each year, and 1.0 percentage points faster than those in NSW. While it should be noted that EBAs are a less important method of setting pay in the construction industry in other States and Territories, the outperformance of EBA wages in Victoria is made clear by the comparison presented in Chart 3.2 below. Chart 3.2: Average annual wage growth in construction industry EBAs VIC Australia ACT QLD SA TAS NT NSW WA 4.0% 4.5% 5.0% 5.5% 6.0% Average of AAWI - 2000 to 2014 (% p.a.) Source: Department of Employment Workplace Agreement Database, Wage growth from EBAs can be examined separately for the construction services, heavy and civil engineering and building construction components of the construction industry. 16

Chart 3.3: Construction industry EBA wage growth at the 2 digit ANZSIC level, Victoria 7% AAWI (%) 6% 5% 4% Source: Department of Employment Workplace Agreement Database, These sub-sectors are briefly defined below: Building construction: mainly engaged in the construction of non-residential buildings such as hotels, motels, hostels, schools, hospitals, prisons or other buildings, in carrying out alterations, additions or renovation to such buildings, or in organising or managing these activities. Building construction also includes construction of residential buildings such as housing construction and apartment construction. It should be noted that industry practice is such that EBAs are rarely used for housing construction. The EBA developments for building construction will therefore provide an indication of developments in non-residential building and apartment construction. 3% 2000 2002 2004 2006 2008 2010 2012 2014 Building construction Construction services Heavy and Civil Engineering Construction Total construction Heavy and Civil Engineering: mainly engaged in the construction or general repair of roads, bridges, aerodrome runways or parking lots, or in organising or managing these activities. Also includes those mainly engaged in the construction of railway, dams, irrigation systems, harbour or river works, water or gas supply systems, oil refineries (except buildings), pipelines or construction projects not elsewhere classified, in the on-site assembly of furnaces or heavy electrical machinery from prefabricated components, or in the general repair of such structures, machinery or equipment, or in organising or managing these activities. Construction Services: mainly engaged in providing services to support building construction or heavy and civil engineering activities. Includes Land Development and Site Preparation Services, Building Structure Services, Building Installation Services, Building Completion Services, Other Construction Services. 17

For EBA wage growth, in terms of the industry sub-sectors identified in the database: Construction services, by far the largest of the three sub-sectors in terms of workers covered by EBAs, has seen slightly higher growth than the average for Victorian construction. Wage growth in Heavy & Civil Engineering Construction has been consistently below the average. Building construction wage growth has generally been lower than in Construction Services and higher than in Heavy & Civil Engineering, though as the smallest category in the database, this sub-sector has seen greater volatility over much of the period, and has seen a surge in wage growth of late. There are a range of outcomes across EBAs within the Heavy & Civil Engineering Construction sub-sector, which are only partly captured in overall measures of wage growth. For example, base weekly wages under the Eastlink EBA for EW1 classification workers 3 rose from $692.90 per week on 1 October 2004 to $832.85 per week on 1 October 2008, an average annual increase of 4.7% per annum. 4 In comparison, base weekly wages under the Victorian Desalination EBA for CW1 classification workers 5 rose from $1309.70 per week on 1 March 2010 to $1,481.80 per week on 1 September 2012, an average annual increase of 5.1% per annum. 6 The Eastlink project was generally considered to be one which was delivered efficiently, while construction of the Victorian Desalination project was seen as having been inefficient. As the wage levels for these two projects show, base wage levels were significantly higher for the Victorian desalination project (even allowing for growth in wages between late 2008 and early 2010), while the growth in wages over the life of the EBA was also higher for the Victorian desalination project. Differences in other terms and conditions across EBAs, such as those relating to flexible work arrangements, can also have an impact on the productivity of projects over and above the wage outcomes in the EBA. Flexible work arrangements are considered in more detail in Chapter 7. Information from the Workplace Agreement database also includes identification of the union or unions party to each agreement. Union involvement has been associated with stronger than average EBA wage growth in the construction industry. CFMEU EBAs have been associated with higher wage growth than other unions. This is true both nationally and in Victoria, though this gap is smaller locally (albeit against a stronger average). Agreements involving the CFMEU have seen the strongest wage growth 3 An Electrical worker grade 1 is a labourer who is doing labouring work and employed as such. 4 ETU and (Thiess John Holland Eastlink) Enterprise Agreement 2004-2008. 5 Construction Worker Level 1 is the base level builder s labourer classification. 6 Thiess Degremont ("TD") and AMWU, AWU, CEPU and CFMEU Victorian Desalination Project Greenfields Agreement 2009. 18

in Victoria of around 5.5%, a full percentage point higher than those involving the AWU, and some 1.5 percentage points higher than EBAs for workers not associated with unions. This appears to be a reflection of the militancy of the CFMEU, which may have allowed it to extract higher wage gains from employers. There is also evidence that the CFMEU is overrepresented in unlawful conduct in the construction industry. Of 169 legal matters with penalty proceedings overseen by the ABCC and FWBC since the inception of the ABCC in 2005, 131 directly involved unions. The CFMEU accounted for 82% of these cases as the sole respondent and a further 5% with other unions. These cases included unprotected industrial action, coercion and unlawful entry. While the statistics are national, Victoria was over-represented, accounting for just over 50% of cases. Most cases related to building construction. 7 The role of the CFMEU is considered further in Chapter 8. It is interesting to note that all of the EBA trends identified here are largely unrelated to differences in the size of the workforce covered by particular EBAs. Stronger wage growth, as measured by the AAWI, was not seen for project-specific greenfields agreements on average compared to non-greenfields agreements, although wage outcomes vary from agreement to agreement. However, it should be noted that wage growth measured over the life of an EBA is only one measure for assessing EBAs. Wage levels have often been higher for greenfield EBAs. The terms and conditions of an EBA can also differ in the extent to which they support the productivity of a project, and need not show a relationship with the wage growth over the term of a particular EBA. The greenfield agreement for the Victorian desalination project was a recent example in which wage levels were considerably higher for the greenfield agreement than under the CFMEU Industry EBA at the time. Applying some reasonable assumptions about the application of the CFMEU Industry EBA to the desalination project, the annual cost at the time of approval of the Desalination Agreement (12 January 2010) of employing a trades labourer for a 51 hour week was $35,336 (or 23%) higher under the Desalination Agreement and the annual cost of employing a qualified carpenter for a 51 hour week was $44,546 (or 28%) higher under the Desalination Agreement (see Chart 3.4). 7 PC (2014), page 530. 19