The Indiana General Assembly is considering a proposal to end the state’s prevailing wage law, known in Indiana as the common construction wage (CCW). Indiana implemented its CCW in 1935 at the request of the state’s labor unions to establish set rates for taxpayer-funded projects in order to provide a “fair” wage for contractors and give local contractors an advantage over out-of-state competitors.
A prevailing wage is the average wage paid to laborers in a designated region. Once the prevailing wage is determined for a region, it is mandated as a wage floor for all contracted workers, and any contractor paying less faces fines or loss of the contract. Proponents of prevailing wage laws argue competition for government contracts and the bidding process lead to cuts in salaries, making the wage floor necessary.
Currently, 32 states have prevailing wage laws, which affect state taxpayer-funded projects above a certain budget floor; Indiana’s floor is currently set at $350,000. Eighteen states do not have prevailing wage laws; 10 of those repealed their laws by legislative action or court decision.
With government contracts constituting a large portion of construction industry revenues, these wage laws also affect other private industries, including limiting jobs in the construction industry. In the 18 states without prevailing wage laws in 2004, construction workers made up 5.3 percent of the workforce compared with only 4.2 percent for states with strong prevailing wage laws, the Mackinac Center for Public Policy found. This should not be a surprise: When the state mandates higher wages for individuals, contractors have less money available to pay for additional workers. Prevailing wages only guarantee higher labor costs, and the burden of these costs is transferred to others in the form of higher prices for contracted goods and services.
Opponents of CCW argue prevailing wage laws are a form of centralized planning and wage control that increases the costs of construction projects, reduces competition, and politicizes public projects. Ohio exempted public school construction projects from its CCW law in 1996 and achieved considerable savings. During the first five years alone, the state saved nearly $500 million, about 10.7 percent of total school construction costs.
Another study, from Michigan, found CCW cost taxpayers $2.24 billion in increased costs, an average of $224 million annually. In Nevada, a 2011 study from the Nevada Policy Research Institute estimated the state’s CCW law increased the cost of public works projects by $625M in 2009 and $346M in 2010.
Instead of allowing natural competition in the marketplace to determine wage level, common construction wage laws control wages, often for political purposes, at taxpayers’ expense. Prevailing wages are often set significantly higher than the normal market level, pushing costs higher. Government projects are often criticized for consistently operating over budget; prevailing wage laws are a central cause. They force contractors to establish labor costs with no consideration for the type of work or the skill of their employees.
Indiana lawmakers should support repeal of their state’s common construction wage law. These laws increase the cost of construction projects, reduce competition, and encourage waste and cronyism.
The following articles explain the origins and effects of prevailing wage laws.
Beacon Hill Institute Study Finds Davis-Bacon Wages Grossly Inflated
Four researchers for the Beacon Hill Institute found the U.S. Department of Labor inflated the prevailing wage on average by about 22 percent, causing an almost 10 percent increase in construction costs. States without prevailing wage laws almost always have lower construction costs than those with prevailing wage laws.
Prevailing Wage Laws: Public Interest or Special Interest Legislation?
This comprehensive study by George C. Leef of the Cato Institute, details the background and current data on the effects of prevailing wage laws in the United States. Leef’s research shows the laws “increase costs and reduce efficiency” as competition is squeezed out of the market.
Delaware’s Prevailing Wage: A Long History of Taxpayer Abuse
Describing the problems prevailing wage laws have caused in Delaware, an analyst at the Caesar Rodney Institute notes the Delaware Department of Labor’s methodology for determining the minimum wage skews the prevailing wage toward higher, union wages and overestimates the prevailing wage by an average of 23 percent (and 40 percent for construction workers).
The Impact of Michigan’s Prevailing Wage Law on Education Construction Expenditures
The Anderson Economic Group estimates the impact of Michigan’s prevailing wage law on the average annual expenditures for construction of K–12 and higher-education facilities in Michigan over a 10-year period.
The Effects of the Exemption of School Construction Projects from Ohio’s Prevailing Wage Law
The Ohio Legislative Services Agency reports repealing the state’s prevailing wage law achieved $488M in savings during a five-year period, a 10 percent reduction in construction costs.
Prevailing Wage Laws: Public Interest or Special Interest Legislation?
George Leef of the Cato Institute investigates whether prevailing wage laws are truly in the public interest or are merely an instance of rent-seeking by a politically potent interest group using its influence to create a government-enforced price-fixing scheme. Leef concludes prevailing wage laws favor special interests by concentrating benefits and dispersing costs. He argues they should be repealed.
Who Really Prevails Under Prevailing Wage?
Geoffrey Lawrence of the Nevada Policy Research Institute argues Nevada’s prevailing wage law adds substantially to the cost of the state’s public infrastructure: “As a result, fewer public funds are available to construct additional projects or to help alleviate fiscal stress within state and local governments. Instead, lawmakers channel hundreds of millions in tax dollars each year to benefit unionized construction labor—with some of that money, of course, subsequently flowing back into the same politicians’ campaign coffers.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
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