Construction projects across the country cost more than they should because of a Depression-era minimum wage law meant to apply only to federally financed public works projects. The law is being applied to projects that have almost nothing to do with federal funding.
The Davis-Bacon Act’s wage requirements kick in at a mere $2,000 of spending. The original threshold was $5,000, but that was lowered to $2,000 in 1935 and has been there since. Had it been adjusted for inflation, the threshold would be more than $30,000 today, still an almost insignificant amount given the costs of most government-funded construction projects.
The act has been applied to a multitude of programs that have little to do with federally financed public works construction. For example, if a program involves federal loan guarantees, construction done with the privately borrowed money will probably be covered by Davis-Bacon.
The purpose of prevailing wage laws is to prevent contractors from undercutting local wage standards. This is considered necessary because of provisions in most public contracting laws requiring contracts to be awarded to the lowest bidder. There is a legitimate concern that a contractor from a low-wage area might submit a low bid and do the job with workers imported from lower-wage areas.
Collective Bargaining Favored
However, critics of prevailing wage laws argue the wage determination methods favor collectively bargained union wages. Considerable evidence backs their concerns.
Most prevailing wage rates are determined by voluntary participation in wage surveys. Construction companies with union contracts have a strong motivation to participate in such surveys, while non-union companies have little or no motivation to do so.
As a result, even though the federal Bureau of Labor Statistics’ Current Population Survey shows only about 14 percent of construction workers belonged to unions in 2007, union collectively bargained wage rates are frequently determined to be prevailing.
The motivation to participate results largely from the survey method—wages for survey purposes are required to be identical for each craft. In the unionized construction industry, the wages are almost always identical, but in the non-union construction industry workers in the same craft often receive different wages based on factors such as the person’s skill level and seniority.
Fringe Benefits Overstated
The same is true of fringe benefits, which are specified to the penny by prevailing wage determinations. Union fringe benefits for workers in a given area are likely to be identical, while in the non-union segment of the industry the costs can differ widely.
In addition, virtually all union fringe benefits payments go to union funds, which then use the money to provide the benefits. In non-union construction, benefits are paid directly to or for employees. The difference between the two approaches can result in misleading calculations of union fringe benefits.
For example, one benefit workers receive is a payment to a union retirement trust, but if the employee doesn’t remain a union member for the required period of time or doesn’t work enough hours in a given period to vest in the fund, the employee receives nothing. For a non-union construction worker covered by a 401(k) plan, by contrast, the funds are deposited immediately in the employee’s account and become the employee’s property.
Unions also calculate as fringe benefits funds that provide little or no benefit to the employee. For example, training funds maintained by the union and used for general training purposes, usually for apprentices, give no direct benefit to the union members on whose behalf they are assessed as a fringe benefit.
Another complicating factor in prevailing wage determinations is job classification. Different unions often claim jurisdiction over different types of work in different areas. Union contracts frequently include various wage levels for different job skills and descriptions.
An incalculable cost of prevailing wage laws is their impact on competition. There is no question that when there are more bidders on a project, the cost goes down, but many contractors decline to bid on prevailing wage jobs, for a variety of reasons.
Chief among these is the considerable paperwork the Davis-Bacon Act requires in the form of weekly payroll reports. The penalties for mistakes on these reports can be severe, so smaller companies lacking the accounting and legal staffs to deal with this burden often decline to bid.
There is also the issue of paying employees different rates on different jobs. Some companies are reluctant to risk alienating workers by appearing to play favorites when selecting which workers are assigned to the higher prevailing wage rate jobs—so they just don’t bid on them.
As construction union density continues to decline, it will be increasingly difficult for these special interests to defend their positions in the face of the obvious waste and discrimination caused by Davis-Bacon and similar laws.
David Y. Denholm ([email protected]) is president of the Public Service Research Foundation, an independent nonprofit organization that studies labor unions and union influence on public policy.