The Benefits of State Prevailing Wage Laws: Better Jobs and More Productive Competition in the Construction Industry

Authors: 
Mark Price
Authors: 
Stephen Herzenberg
Publication Date: 
October 3, 2011

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Overview

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.

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 weakening prevailing wage laws have been introduced into the Pennsylvania Legislature.  This briefing paper 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.

Consistent with the original rationale for establishing prevailing laws, a rigorous body of economic research shows that efforts to repeal these laws lead 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 effect 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 more than 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.

Claims by opponents that prevailing wage laws raise costs by 30% ignore research based on real-world experience and “natural experiments” in states that have repealed prevailing wage laws.  These claims are based not on actual experience but on hypothetical calculations that assume, implausibly, when wages and benefits go up, worker skill levels, productivity and other factors remain unchanged.  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% of total costs (less on many capital-intensive public projects), the claim that prevailing wage laws raise costs by 30% is completely implausible.  To generate savings of 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 any 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.

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 exploit a vulnerable immigrant workforce.

If Pennsylvania policymakers 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, the 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.

The rest of this policy brief considers in more detail the impact of state prevailing wage laws on different construction industry outcomes, such as project cost, training, health and safety, health and pension benefits, and the extent to which the construction sector shifts costs to other industries and the public sector by paying workers’ poorly or failing to provide them with health care.  In all these areas, 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.  There’s never a good time to enact a policy that saves the state and its localities no money while lowering wages and destroying good middle-class jobs.  But it is hard to think of a worse time than now.

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