Immigration Reform 2013: How It Could Cripple the Construction Industry

We’ve been promised immigration reform for many years. In fact, it’s been promised by many recent administrations. There are barriers to effective reform; mostly political and economic ones. When politicians look at what they can do, they don’t always use criteria that we might expect. One area of concern is the construction industry. When builders begin a construction project, they attempt to price their project in a way that will undercut their competition and still allow them to make a profit.

Estimating the cost of building a house is a straightforward process, consisting of land cost, materials, and labor. Land costs are generally market driven; builders can’t do much about them. Materials costs like lumber, nails, appliances and concrete are more or less the same for everyone. That leaves labor. A builder has options with the cost of labor. The options include using union labor or non-union labor and using legal residents of the U.S. or illegal aliens.

If a builder chooses to use illegal aliens, the cost savings can be substantial. Wages paid to undocumented workers might be as much as one-third the cost of skilled workers who are union members. There is an opportunity for a builder to enhance their competitive position if they choose to use workers who will accept lower wages. It’s not a question of skilled vs. unskilled labor; many immigrants bring excellent skills with them. But a comprehensive immigration reform package from Congress could have an enormous impact on the industry.

The issue is much more complicated than simply granting amnesty, as Ronald Reagan did in 1986. The Law of Unintended Consequences relates, in this instance, to the effect of government actions which generate changes which were not a part of the original motivation for those actions. If we consider the impact of illegals to be substantial, reform could magnify that impact almost overnight. If a large number of construction workers are suddenly no longer undocumented and illegal, it is likely they would no longer be willing to work for minimum wage. Once they are allowed to come out from the shadows of the underground economy, they can accept “regular” employment. When this happens, employers will have to begin paying and withholding taxes and well as to pay them a competitive wage. From a human rights perspective, this can only be viewed as a positive thing; from the perspective of a home builder, it could be a disaster.

Once building costs are set based on a level playing field, the cost of new housing can only go up. The question of the day is, how much? Conceivably, the increase could be significant enough to cause a market shift from new construction to resale homes. A large enough shift could initiate a wave of construction company failures; resulting in bankruptcies that could rival the real estate collapse of the early 1980’s.

There’s more to consider here than whether immigrants are allowed to flow across our borders unchecked. The reality is they’re here. Despite the frustration, they are already an important part of our economy and a disruption of such a large segment of the construction industry can force sweeping changes to the economic landscape. Be careful what you wish for.