Federal Infrastructure Push May Worsen State, Local Budget Problems

Published March 1, 2009

President Barack Obama has proposed spending hundreds of billions of dollars on infrastructure as an economic stimulus to “create millions of jobs.”

However, experts say increased federal spending on infrastructure could worsen the financial problems of many state and local governments while providing an enormous boon to organized labor.

Many of the nation’s highways, bridges, schools, and other public structures need repairs. The American Society of Civil Engineers estimates the infrastructure deficit—the amount needed to fix and maintain public structures—at $1.6 trillion.

‘Prevailing Wage’ Hikes Costs

However, federal infrastructure spending will bring the Davis-Bacon Act with it. That’s a Great Depression-era law mandating payment of “prevailing wages” on federal construction projects. Over the years the law has been extended to cover a wide variety of construction spending, not just federal government construction projects.

The original intent of Davis-Bacon was to prevent federal construction spending from disrupting the wage scales of local communities, by requiring payment of wages prevailing in the community. It blocked itinerant contractors from low-wage areas from making winning bids on projects in high-wage areas and forcing wage cuts.

But there is strong and growing evidence Davis-Bacon wage determinations do not reflect the wages prevailing in a community, because of flaws in the methodology of the surveys determining them.

Wages Don’t Prevail

Participation in the surveys is voluntary, and union contractors have an extremely high level of motivation to participate while non-union contractors have little or no motivation to do so.

As a result, even though nationally in 2007 only 13.9 percent of construction workers were union members, Davis-Bacon wage determinations often reflect union wage rates.

Estimates of the increased cost of labor from prevailing wage laws are generally around 25 percent. That can increase construction project costs by more than 17 percent, depending on the nature of the project.

Non-Union Firms Discouraged

Davis-Bacon is driving up construction costs both by requiring significantly higher wage rates than actually prevail and by discouraging nonunion contractors from bidding on public works projects.

Many open-shop contractors would rather avoid paying employees a different rate on public works projects than they pay on commercial projects. In addition, the paperwork associated with Davis-Bacon compliance is extensive and the penalties for even inadvertent mistakes can be severe.

Construction union membership as a percent of the U.S. workforce has been declining for more than 60 years. According to Leo Troy, professor emeritus of economics at Rutgers University, in 1947, 87 percent of all construction workers were union members. By 1983, when modern record-keeping on union density began, that figure had fallen to 27.5 percent.

The current rate of 13.9 percent varies from state to state, ranging from a high of 41.3 in Illinois to a low of 1.1 in North Carolina.

Some States Hit Harder

The problem for states is that federal infrastructure spending rarely covers 100 percent of construction costs, instead commonly providing a rather small percent of the total project cost.

In states without prevailing wage laws, increased federal participation in infrastructure spending decisions, plus Davis-Bacon, could increase the cost of projects more than the value of the federal contribution.

Union Rules Forced on Builders

Another way infrastructure spending could become a boon to construction unions but a burden for states and localities is if Obama issues an executive order mandating project labor agreements on construction covered by the spending.

A project labor agreement (PLA) requires all construction workers be obtained through union hiring halls and the payment of union dues for all workers, whether they are union members or not.

There is some precedent for such a move by Obama.

In June 1997, President Bill Clinton issued an executive memorandum encouraging federal agencies to consider PLAs on federal construction projects. Informed opinion speculated it was issued as an executive memorandum instead of an executive order because the Republican-controlled Congress could negate an executive order but not a memorandum.

With a Democrat-controlled Congress, Obama would not be under similar constraints.

Similarly, in 2003, shortly after taking office, Illinois Gov. Rod Blagojevich (D), who received heavy union support during his 2002 election campaign, issued an executive order mandating consideration of PLAs on all state construction projects.

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.