“Prevailing wage” laws that require state and local governments to pay union wages on public works projects are coming under increasing attack by taxpayers and courts.
In April, Pennsylvania Gov. Ed Rendell (D) backpedaled furiously after issuing a directive applying that state’s prevailing wage law to street maintenance work done by boroughs (local governments) across the state. The Pennsylvania State Association of Boroughs estimated the directive would add $200 million a year to the cost of street maintenance, creating such a howl of protest from taxpayers that Rendell quickly rescinded the directive.
In May, a court in Oregon ruled the state’s prevailing wage law did not apply to redevelopment projects implemented through public-private partnerships. That overturned a ruling by Oregon Labor Commissioner Dan Gardner, a former construction union official, who said the state’s prevailing wage law applied to these projects because some public funding is involved. Gardner is appealing the court’s decision.
Also in May, legislation was introduced in New York State to apply the state’s prevailing wage law to construction done by private companies participating in Industrial Development Agency (IDA) projects. IDA officials oppose the legislation and contend companies will not participate if their work is covered by the state’s prevailing wage law.
Davis-Bacon Sets Tone
The best-known prevailing wage law is the federal Davis-Bacon Act, which applies to all construction projects using at least $2,000 of federal funding. Thirty-three states have similar laws. Some of them are exacting, and some have limited application or are so vague as to be meaningless.
There is little doubt prevailing wage laws protect unions from competition, as the wages government determines to be “prevailing” tend to be the unions’ collectively bargained wage rates. There was a time when this had no meaningful impact: Professor Leo Troy reports that in 1947, 87 percent of all construction workers in America were represented by unions.
Today, however, prevailing wage laws dramatically increase construction costs. According to the federal Bureau of Labor Statistics, in 2005 only 13 percent of the nation’s construction workers were unionized, and that number is falling steadily. On prevailing wage projects, the cost of labor thus exceeds the true market wage rate, costing taxpayers a small fortune every year.
Billions Added to Costs
In April 2006 the U.S. Census Bureau estimated approximately 22 percent of all construction spending in the nation was on public works projects, a dollar value of about $262 billion. A Government Accounting Office report issued in 1979 found the Davis-Bacon Act increased construction costs by 5 to 15 percent. That suggests between $13 billion and $39 billion is wasted every year on overpriced public works construction.
Other estimates are much higher. A study by the Economics Department of the University of Oregon found that on rural, nonresidential construction the Davis-Bacon Act caused waste between 26.1 percent and 37.7 percent. In 1983 the President’s Private Sector Survey, known as the Grace Commission, put the figure at 25 percent.
A great deal of the cost depends on the type of construction. The labor cost component of new construction is much lower than for repair and renovation. If a prevailing wage law increases labor costs by 25 percent, it will increase the cost of new construction less than it will the cost of renovation, as the latter is more labor-intensive.
Exemptions Save Money
In 1997 Ohio exempted public school construction from that state’s prevailing wage law. A 2002 study by the Ohio Legislative Service Commission found the exemption reduced school construction costs by more than 10 percent.
School construction costs have played an important role in battles over prevailing wage laws. In 1974, Florida exempted school construction from its prevailing wage law. Four years later, a study found the exemption had reduced school construction costs by 15 percent. The following year, Florida’s prevailing wage law was repealed in its entirety.
Since 1979 nine states–Alabama, Arizona, Colorado, Florida, Idaho, Kansas, Louisiana, New Hampshire, and Utah–have repealed their state “mini Davis-Bacon Acts.” The continued decline of membership in construction unions and other private-sector unions–and thus the weakening of their influence on public policy–will undoubtedly focus additional attention on this issue.
David Denholm ([email protected]) is president of the Public Service Research Foundation.