For those in the political center, housing policy is primarily viewed from a supply side angle. We need to build more so that prices come down, goes the mantra. New housing construction and its affordability is inherently linked to housing productivity, i.e., how much share of a building a worker can build in an hour, or more elegantly, a worker’s gross value added per hour (which accounts for quality related aspects of new housing).

Housing productivity is down everywhere in the developed world. One reason that is often cited is the Baumol Cost Disease, i.e., productivity in labor-intensive sectors is stagnant and thus the cost of products produced or services rendered increases faster than inflation. With much of the work unautomated and provided custom-made on site, the construction sector is a case in point, almost as intuitive as the hairdresser usually chosen an an example.

However, a significant explanation for falling productivity is also related to its measurement. If a builder sells you a prefab house and assembles it on site for you (with some additional material), much of the gross value added is now accounted for in intermediary goods, causing overall productivity to fall.

I first came across this interesting debate while listening to an episode of the Ezra Klein Show a while back. Jake Auchincloss, a member of Congress from Massachusetts, suggested the Cost Disease in construction is one of the main drivers of the cost of living crisis. And hence the way to alleviate this problem is by getting more prefabricated housing into the mix.