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.