Prevailing-Wage Policy Drives Up Costs in Kentucky

Published December 1, 2007

Prevailing-wage laws added 7 percent–nearly $137 million–to the cost of government construction projects in Kentucky in 2002, the latest year for which figures are available, according to the nonpartisan Legislative Research Commission (LRC).

In 39 of the commonwealth’s counties, federal prevailing-wage determinations are applied to government construction projects. The state’s remaining 81 counties are divided into 20 prevailing-wage localities.

This formula for determining prevailing wages has distorted government-mandated wage rates for workers with similar skills, depending on where they work.

For example, while the Bureau of Labor Statistics (BLS) has determined the market-wage rate for Kentucky’s plumbers is $18.15, state labor officials have established a rate of $23.75 for plumbers building schools in Owsley County and $26.31 for plumbers working on public projects in Oldham County.

The state Labor Cabinet uses the federal government’s wage determination for Louisville, but sets its own rates in Lexington–even though both are medium-sized cities with a fairly large university.

Such a complicated approach to setting wage rates on government projects has resulted in almost no competition from nonunion contractors who need a more predictable system.

Unions Prevail

A 2001 survey by LRC determined that while union workers comprise only 22 percent of the state’s nonresidential construction workforce, union labor groups account for 81 percent of wage data submitted at public hearings held to establish prevailing-wage rates.

Kentucky’s politicians seem easily intimidated by union threats of political retaliation if changes are made to the prevailing-wage system.

Kentucky union leaders brought in out-of-state union officials to heckle Gov. Ernie Fletcher (R) as he made his way through the Capitol Rotunda to give his 2006 “State of the Commonwealth” speech. In that speech Fletcher said Kentucky could “build more and better schools to prepare for an expanding workforce by repealing prevailing wage.” He has since backed away from his strong stance on the issue.

Streamlining Needed

While eliminating Kentucky’s prevailing-wage policy doesn’t appear politically feasible, streamlining and simplifying the state’s Byzantine wage-determination process would likely lower the price tag of public projects.

In a recent Bluegrass Institute report, researcher Paul Kersey concludes the state needs to encourage more participation by nonunion contractors, who loathe the current wage-setting process.

Doing so would likely result in more market-like wage rates–which are, on average, 24 percent lower than most of the state’s prevailing wages.

Kersey suggests changing from the current practice of gathering wages at public hearings–which gives an unfair advantage to unions–to a more discreet process in which the state surveys contractors with at least five employees.

Confidentiality Would Help

Because nonunion employers do not want to disclose their wage and benefit schedules, they usually do not respond to prevailing-wage surveys. Kersey says the state could “encourage replies” by adding a provision to the law that keeps such sensitive information confidential.

“While there are open-records laws to consider, it seems reasonable that at least documents relating to private businesses’ internal operations can be allowed to remain confidential,” Kersey writes. “Otherwise, the system will be limited to producing primarily union-like wage rates.”

Hospital’s Costs Balloon

Such excessive wage rates have resulted in exorbitant markups on projects like a new hospital at the University of Kentucky.

A Bluegrass Institute presentation before a House committee last year indicated the state’s prevailing-wage demands meant taxpayers would pay an additional $20 million–nearly 5 percent–for the $450 million hospital, scheduled for completion by 2011. The cost of the project has since been revised upward to $525 million, meaning taxpayers will pay an even higher prevailing-wage bill for the facility.

While going back to the taxpayers’ till is an option for public officials when the cost of public projects soar higher than the original estimates, private contractors–who must be profitable to stay in business–must more accurately determine labor costs.

Tennessee Has Model Approach

Kersey also suggests following Tennessee’s example of simplifying the prevailing-wage process. Unlike Kentucky, where workers can demand a wage hearing at just about any time, the Volunteer State uses two surveys.

One is an annual survey of road-construction companies; the other surveys nonresidential building construction contractors every other year.

The road-construction survey results in a single statewide schedule of rates, while the building-construction appraisal is divided into 12 districts. The information is used by the state to determine wage rates for 22 separate occupations that are uniform for all districts.

Tennessee hires two full-time workers for about six months of work when the wage determinations are made, greatly reducing administrative costs.

Thirty-three states have prevailing-wage laws. “If you have to have a prevailing-wage program, Tennessee’s is the model,” said Kentucky State Rep. Jim DeCesare (R), who continues to promote more sound labor policies in the state.

Jim Waters ([email protected]) is director of policy and communications at the Bluegrass Institute for Public Policy Solutions in Bowling Green, Kentucky.

For more information …

“Kentucky’s Prevailing-Wage Policy: Plan B,” by the Bluegrass Institute, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to and search for document #22166.