As housing costs continue to soar across Australia, partly due to a supply shortage amid population growth, new research suggests that the nation could build 12% more homes each year without hiring a single additional construction worker—if the industry became more efficient.
A new report from the Committee for Economic Development of Australia (CEDA), supported by Productivity Commission findings, argues that labour productivity in construction has declined by 12% since 1994. By contrast, overall labour productivity across the broader economy has grown by 49% during the same period.
According to CEDA economists Melissa Wilson and James Brooks, the usual suspects—industrial relations issues and workplace conditions—aren’t the main reasons for this decline. Instead, they point to systemic inefficiencies, including slow and complex building approvals, limited innovation, fragmented operations, and a dominance of small-scale firms.
Fragmentation Hinders Productivity
The report highlights the fragmented nature of Australia’s construction sector, which currently comprises over 410,000 businesses—98.5% of which employ fewer than 20 people. More than 90% are microbusinesses with fewer than five employees, up from 43% in 1989.
While small firms account for over half of building expenditure, they significantly lag in output. CEDA found that construction companies with 200 or more employees generate 86% more revenue per worker than those with 5–19 employees.
If the construction sector had the same firm size distribution as the manufacturing industry, it could increase annual output by 12%, or $54 billion, equivalent to adding 150,000 workers—without hiring anyone new.
Not all experts agree. Former NSW building commissioner David Chandler argued that large firms are often expensive and risk-averse, with many Tier 1 contractors being foreign-owned.
Still, international research supports the broader claim: in the U.S., construction firms with 500 or more workers build six times as many units per employee as those with under 20 employees.
Subcontracting and Tax Incentives Fuel Inefficiency
One of the key issues is the growing reliance on subcontracting, which has fragmented the industry further and increased inefficiencies in procurement, regulation, and dispute resolution. Rework and conflicts are common productivity drains, according to consultations cited in the report.
Wilson and Brooks also blame tax incentives for encouraging the proliferation of microbusinesses. Small construction contractors often pay lower taxes than salaried workers, using discretionary trusts and company structures to reduce their liabilities.
For instance, a contractor earning $148,000 could pay just 18% tax—compared to 26% as a salaried worker—resulting in a $12,400 annual difference. Additionally, instant asset write-offs allow small business owners to further reduce taxable income.
Independent economist Saul Eslake criticized this bias, calling it “small business fetishism”—the belief that small business owners deserve preferential treatment.
Policy Recommendations
The report suggests several reforms to improve efficiency and encourage the growth of larger, more productive firms:
- Streamline regulations across local and state governments to reduce approval delays.
- Stabilize demand through consistent infrastructure and public housing investment to ensure predictable workflows.
- Reform tax policy to align tax treatment across business sizes and income types.
The authors also point to Auckland, where easing planning regulations appears to have boosted construction productivity.
Ultimately, the report argues that addressing inefficiencies and outdated policies in the construction sector could significantly enhance Australia’s housing supply—without needing to expand the workforce.
