Cheaper Machines, Costlier Buildings: The Drag on Long-Run Growth

Why It Matters

Rising construction costs offset a sizable share of the growth benefits from cheaper equipment, making construction productivity a critical lever for long‑run economic performance.

Key Takeaways

• US structure prices 80% higher than 1970 levels
• Equipment price decline adds 1.3% growth; structures cost cuts half a point
• Construction TFP fell, explaining ~60% of price rise
• High‑income economies see similar construction cost spikes
• Policy must boost construction productivity beyond land‑use reforms

Pulse Analysis

The post‑war American economy has benefited from a steep decline in the relative price of equipment, a key driver of investment‑specific technological change. Researchers estimate that cheaper machinery lifted per‑capita output growth by roughly 1.3 percentage points. At the same time, the price of structures has surged—about 80 % above its 1970 level in the United States and similarly in other high‑income nations. When the two trends are combined in a two‑capital growth model, the rising cost of buildings erodes roughly half a percentage point of the equipment‑driven gain, leaving a net boost of only 0.8 points.

The primary source of the building‑price surge is a persistent slowdown in construction productivity. A KLEMS decomposition attributes about 60 % of the increase in construction‑sector relative prices to declining total‑factor productivity since the mid‑1990s, a pattern that holds across most advanced economies. This mirrors Baumol’s cost‑disease hypothesis: a sector with stagnant output growth must become more expensive as the rest of the economy advances. Because structures are inputs to virtually every industry—from hospitals to semiconductor fabs—their rising cost spreads to the broader economy, even dampening research‑intensive activities that rely on modern facilities.

Policymakers therefore need to treat construction productivity as a macroeconomic priority, not merely a housing‑market issue. While land‑use regulation and permitting reforms can ease price pressures, deeper gains will require innovations in building methods, greater scale economies in residential construction, and reforms to building‑code standards and public‑procurement practices. Accelerating productivity in the sector could unlock a substantial portion of the growth that is currently being bottled up by expensive structures, reinforcing long‑run economic expansion and enhancing the competitiveness of advanced economies.