Modelling the impact of oil price changes and investment decisions on construction wages in the U.S.

Abstract

The U.S. construction industry has been known to employ workers without a college education and provide adequate compensation make ends meet. Today, job quality in the industry has deteriorated to a level where wages are too low, causing workers to rely on U.S. safety net programs. This may be exacerbated by oil price changes, especially in regions where the oil industry is a significant driver of the economy. In this paper, we investigate the effects of oil price dynamics on real wages in the construction industry. A non-linear ARDL and TAR model are used for the empirical exercise which focusses on six top oil producing counties in the U.S. Long-run findings indicate that a 10% increase in oil price increases construction wages by 1.4, 1.2 and 9.3% in Kern, Weld and McKenzie Counties, respectively. Short run estimates indicate that a positive shock to oil prices increases wages in McKenzie County, North Dakota. Results from the TAR model show that the impact of an expansionary monetary policy to increase investment – and accordingly, increase wages – is diluted when oil prices are below the low oil price threshold.

Keywords:

• Oil prices
• investment decisions
• construction wages
• regional economics
• threshold

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Note that the drop in construction workers in the U.S. economy between 2008 and 2012 was attributed to the recession. Likewise, the increase in SNAP participation during that period may have been driven by individuals from a broad range of industries along with changes in government policy and programs aimed at increasing participation in the SNAP program.

2 A broader discussion of the Davis-Bacon Act, along with links to state-level prevailing wage legislation, is provided by the following link: https://www.ncsl.org/research/labor-and-employment/prevailing-wage-resources.aspx.

3 World Oil (2022). Texas oil regulator releases October 2020 production statistics. Accessed on July 2021. Available at https://www.worldoil.com/news/2020/12/28/texas-oil-regulator-releases-october-2020-production-statistics

4 Occasionally, data may not be available for the entire county but for the major metropolitan statistical area (MSA) in that county. We therefore use county to include this data.

5 Return to work laws are those that protect the rights of workers who need time off for illnesses, injuries, or for a qualifying disability. These laws include the Americas with Disabilities Act (ADA), the Family and Medical Leave Act (FMLA) and state-level disability laws.

6 Labour licensing laws are state-level laws that prescribe certain educational outcomes, skills, training, or other requirements to be considered able to work in a certain occupation.

7 Real earnings are wages adjusted for inflation (Cambridge University Press 2022).

8 A battery of tests were performed to test for autocorrelation (Durbin-Watson test), heteroskedasticity (Breusch-Pagan-Godfrey test), serial correlation (Breusch-Godfrey LM test) and functional form (Ramsey RESET) (Sarkodie and Adams 2020). We do not present these results (for brevity) but findings are available upon request from the authors.

9 In Lea County, only when oil prices are in the intermediate price threshold level are oil prices changes positively related to construction wages.