The steady decline in the relative price of equipment has long been seen as a primary engine of long-run growth. This column documents a quieter, countervailing trend. In the US and other high-income economies, the relative price of structures has been rising for half a century. It now offsets a substantial share of the gains from cheaper equipment. The proximate driver is weak productivity growth in construction itself.
The cost of building has become a visible policy concern across advanced economies, from rising house prices to the cost of public infrastructure. Brooks and Liscow (2023) document that the inflation-adjusted cost of a mile of US interstate highway tripled between the 1960s and the 1980s. Goolsbee and Syverson (2023) show that measured productivity in US construction has fallen by roughly 40% since 1970, while productivity in other sectors has roughly doubled. The relative price of structures has risen sharply in the US and in most other high-income economies.
In recent work (Choi and Lee 2026), we ask how this rise affects long-run growth. Equipment prices have fallen sharply over the past half century, the signature of investment-specific technological change documented by Greenwood et al. (1997). Structures prices have moved in the opposite direction. When we put both trends into a two-capital growth model, the rise in structures prices offsets a substantial share of the growth that cheaper equipment would otherwise have delivered.
Equipment prices versus structures prices
Start with equipment. The relative price of equipment in the US has fallen sharply since 1970 (Greenwood et al. 1997). The subsequent literature treats it as one of the primary engines of postwar growth. Karabarbounis and Neiman (2014) show that the same equipment-price decline accounts for much of the global fall in the labour share. Topalova et al. (2019) provide complementary cross-country evidence that lower relative prices of machinery and equipment raise real investment, while warning that slower productivity growth and weaker trade integration may limit further declines in capital-goods prices.
Structures have moved in the opposite direction. Figure 1 plots the equipment price and structures price trends by income group from 1950 to 2020. The relative price of structures in the US is now 80% higher than its 1970 level. The upward trend extends across most other high-income economies. Low-income economies look different on both margins: equipment prices fall more slowly than in rich economies, but structures prices barely move.
Figure 1 Relative price of equipment and structures by income group, 1950–2020
Notes: Relative prices are calculated by dividing each asset type’s investment price index by the GDP price index, with 1970 set equal to 1. Countries are grouped by real GDP per capita in 1970. The low-income group, shown in green, includes the bottom tercile, while the high-income group, shown in red, includes the top tercile. The sample covers 120 countries with reported prices in 1970. Shaded areas show the 15th to 85th percentile range. Dashed lines show each group’s median, and the solid black line shows the United States as a benchmark.
Sources: Penn World Table 11.0, PWT Capital Detail, and authors’ calculations.
Three additional pieces of evidence support taking these price movements at face value. First, real investment rates respond negatively to their own asset-type price. Second, equipment and structures prices are negatively associated with income growth across countries. Third, within the US, the rise in structures prices is broad-based across structure types. That pattern is more consistent with an economy-wide shift in construction costs than with factors specific to a single asset class.
A drag on growth
We build a two-capital endogenous growth model and calibrate it to the postwar US. Both equipment and structures enter the model as inputs to final goods production and to R&D. In the calibration, equipment accounts for about 15% of the production input bundle and 26% of R&D inputs; structures account for 23% and 7%, respectively.
In the baseline calibration, falling equipment prices have lifted annual growth in output per person by about 1.3 percentage points. The rising relative price of structures pulls growth down by about half a percentage point. The net contribution of investment-specific technological change is therefore roughly 0.8 percentage points rather than 1.3. Almost two-fifths of the growth gain from cheaper equipment is bottled up by the rising cost of structures.
About three-quarters of the drag runs through standard capital deepening. When structures are expensive, firms accumulate less of them, and production slows accordingly. The remainder operates through innovation. Laboratories, offices, and pilot plants are themselves structures. Stagnant productivity in construction raises the cost of doing science.
Where the rising price comes from
Why have structures prices been rising? Our KLEMS decomposition points to a single proximate driver: weak total factor productivity in construction. About half of the post-1996 rise in the US construction sector’s relative output price is explained by declining construction TFP. Figure 2 extends the exercise to other advanced economies. It plots cumulative construction-sector TFP growth against the cumulative change in the relative construction price from 1995 to 2021. Every country in the sample, with one exception, sits in the quadrant of rising construction prices and falling construction TFP. The exception is Belgium. Japan, the UK, Germany, and France all line up alongside the US. On average, declining TFP accounts for about 60% of the rise in relative construction prices across countries. The US share, at 59%, is essentially the cross-country average.
Figure 2 Cross-country construction TFP growth vs. change in relative construction price, 1995–2021
Notes: The figure plots each country’s cumulative productivity growth in the construction sector against its cumulative change in the relative construction price. Both measures are accumulated from 1995 to 2021, except for the United States, the United Kingdom, and Japan, where the period ends in 2020, and Belgium, where the period is 1999 to 2021. The cross section includes the United States (USA), Japan (JPN), Germany (DEU), France (FRA), the United Kingdom (GBR), Italy (ITA), Austria (AUT), Belgium (BEL), the Czech Republic (CZE), Denmark (DNK), Finland (FIN), the Netherlands (NLD), and Sweden (SWE).
Sources: EU KLEMS 2024 and authors’ calculations.
What lies behind this construction-productivity decline is a question on which the literature has converged less. A natural first answer is regulatory constraints. Hilber and Vermeulen (2016) make a careful case along these lines for England, showing that the restrictiveness of the local planning system, more than physical land scarcity, drives the long-run rise in English house prices. D’Amico et al. (2024) link the stagnation in US construction productivity directly to land-use regulation. These accounts capture an important piece of the story. Whatever the deep cause, the effect of weak construction productivity on aggregate growth is quantitatively large.
A Baumol reading
This pattern looks like Baumol’s cost disease (Baumol 1967). Productivity growth in construction is weak, yet the rest of the economy still needs the sector’s output. Therefore, the relative price of structures rises, and the rest of the economy pays for it. One feature distinguishes construction from many other low-productivity sectors. Structures enter nearly every part of the economy as inputs, and the economy cannot easily make do with fewer of them. Hospitals need them. Semiconductor fabs need them. Data centres, increasingly, need them.
What this means for policy
Construction productivity is no longer a sector-specific concern. The magnitudes we document make it a major determinant of long-run growth, with effects that reach the rest of the economy, including the research sector.
Some of the relevant policies are familiar. Reform of land-use rules and permitting matters, even if it is not the whole story. What has received less attention is how to raise productivity inside the construction industry itself. That will mean serious attention to construction methods, to scale economies in homebuilding, to the regulatory architecture around building codes, and to how governments procure public infrastructure. The cost of construction has become a major drag on long-run growth in advanced economies. The growth-policy debate should treat it that way. 
Source : VOXeu
