Construction workers on projects covered by Pennsylvania’s prevailing wage law must be paid minimum “prevailing” wage and benefit levels which vary by occupation and geographical area within the state. This year, about 20 different proposals for eliminating or weakening prevailing wage laws have been introduced into the Pennsylvania legislature. This issue overview reviews the economic research on prevailing wage laws so that legislators and members of the public can determine their position on these laws based on evidence rather than ideology.
History of Prevailing Wage Laws
Construction industry prevailing wage laws have long operated nationally and in states as a check against the tendency of the construction industry to degenerate into destructive wage and price competition. Such competition can drive skilled and experienced workers from the industry, reduce productivity and quality, and lead to poverty-level jobs, all without saving construction customers any money.
The Research on Prevailing Wage Laws
Consistent with the original rationale for establishing prevailing laws, a rigorous body of economic research shows that their repeal leads to:
- less workforce training,
- a younger, less educated and less experienced workforce,
- higher injury rates,
- lower wages; and
- lower health and pension coverage.
Research also reveals that prevailing wage laws do not raise costs, suggesting that the positive affect of higher wages on productivity compensates for higher labor costs.
- Comparing school construction costs before and after Michigan’s suspension of its prevailing wage law revealed no difference in costs.
- National analysis of data on school construction costs reveals that prevailing wage laws do not have a statistically significant impact on cost. By far the biggest impact on school construction costs is whether that construction takes place at times of low unemployment, when construction demand and prices are high, or at times of higher unemployment. Schools built at times of higher unemployment, when construction bids are much lower, can cost over 20% less per square foot than schools built during times of high demand. Consistent with this estimate, in and immediately after the recent “Great Recession,” Pennsylvania was able to finance 28% more projects with American Recovery and Reinvestment Act dollars than initially estimated.[i]
Claimed Savings From Weakening Prevailing Wage Are Not Based on Actual Experience
Claims by opponents of prevailing wage laws that these laws raise costs by 20-30%[ii] ignore research based on real-world experience and “natural experiments” in states that have repealed prevailing wage laws. Rather than being based on actual experience, these claims are hypothetical calculations that assume, implausibly, that when wages and benefits drop, everything else, including worker skill levels and productivity, remains unchanged. In reality, in the construction industry as in the professions and other skilled occupations, “you get what you pay for”—lower wages and benefits mean a less qualified workforce. Since labor compensation in Pennsylvania accounts for only 24 percent of total costs (less on many capital-intensive public projects), moreover, the claim that prevailing wage laws raise costs by 20 to 30 percent is completely implausible.[iii] To generate savings of 20 to 30 percent would require employees to work for free in the absence of a prevailing wage law, while also achieving the same level of productivity.
Beyond its direct impacts on public construction, repealing the state’s prevailing wage law could also increase public sector costs for health care and social services. It could
- lower the share of construction workers with employer-based health insurance, while increasing the share who rely on Medicaid and uncompensated care,
- increase the numbers of construction workers who in their old age will not have adequate retirement income, and,
- by lowering wages, increase the chance that construction workers will need public assistance to provide food, clothing, shelter and education for their families.
A Better (and Evidence-Based) Idea for Lowering Costs on State Construction Projects...Buy Low
Pennsylvania’s prevailing wage statute has made it more likely that construction contractors compete based on skill, productivity and experience. This law is more important than ever today because of the temptation and competitive pressure some contractors face to compete by exploiting a vulnerable immigrant workforce.
If Pennsylvania policy makers want to save money on public construction, the research evidence shows that the best route would be to shift construction to periods of higher unemployment—such as right now. Based on the research and the pressing need for more jobs today, Keystone Research Center has recommended launching the “Buy Low” Rebuild PA Initiative by increasing the state’s bond-financed investments in schools, transportation, and infrastructure. By ramping up construction projects now, the state would create additional jobs as well as get much better value for money. Longer-term, more counter-cyclical public construction would have the added advantage of making employment less volatile in the industry, enabling the industry to retain experienced workers because their annual incomes fluctuates less.
In summary, research shows that prevailing wage laws contribute to more “constructive competition” in the construction sector—competition based on skills, productivity, and quality rather than paying low wages to inexperienced workers in unsafe conditions. These laws also help ensure that jobs go to local workers whose families shop in local businesses, strengthening local economies—and that jobs don't go to low-wage workers brought in from out of state.
There is never a good time to enact a policy that does not save the state and its localities money but does lower wages and destroy good middle-class jobs. But it is hard to think of a worse time.
[i] Commonwealth of Pennsylvania, Office of the Budget, Budget Sense, January 2011.
[ii] Joe Grata, “Wage Ruling May Raise Road Costs,” Pittsburgh Post-Gazette, April 8th 2006. See also http://thirdandstate.org/2012/march/prevailing-wage-opponents-fail-laugh-test
[iii] U.S. Department of Commerce, Economic Census of Construction, 2002.