Issue Summary (Reviewed January 2011)
Mandated Wages: Prevailing Wages--State

The Issue:

In 1931, the federal government passed the Davis-Bacon Act which requires all contractors working on federal government projects (with a value of at least $2,000) to pay their employees the “prevailing wage” for that particular occupation. This was done to protect local laborers from cheap migrant labor. Promoters of the Act claimed it would enable American workers to spend the economy out of the Great Depression. They also claimed that those workers would be more productive which would, over time, drive down the cost of government construction projects.

Prevailing wages are set at or near the union-scale level. Under Davis-Bacon, contractors using non-union employees must pay them union level wages, raising the cost of a project. The Congressional Budget Office claims that if this wage mandate were lifted, it could save taxpayers about $1 billion per year. However, this problem is not relegated to the federal government—31 states have enacted state-level prevailing wage laws, including Pennsylvania.

It has been estimated that prevailing wage laws add about 10 to 15 percent to the cost of a construction project. The elimination of this requirement could amount to substantial savings not only for the state (which spends more than $2 billion per year on construction projects) but for counties, municipalities, and school districts (which spend more than a half a billion dollars on projects subject to the prevailing wage). A savings of 10 percent would result in substantial relief for taxpayers.

What We Know:

Prevailing wage laws not only dictate the wage rate for each craft classification, it also mandates an hourly price for “fringe” benefits. Fringe benefits for union workers are programs that are paid from trusts that have been built from dues payments and are not subject to payroll taxation. However, for the non-union firm the absence of such programs means that fringes must be paid directly to the employee as a supplement to the hourly wage and thus subject to payroll taxes. Therefore not only are non-union firms required to meet the wage being paid by union firms, but must exceed them through fringe payments and then must pay more in payroll taxes than their union counterparts. This is enough keep non-union contractors from even bidding on government contracts— giving union contractors a monopoly on government projects.

From 1979-1995, ten states repealed their prevailing wage law. Among the reasons for doing so was that the law forced employers to pay more for labor that the market would have otherwise dictated; it allows employers to discriminate in hiring workers; it raises the cost of government; it increased administrative costs.

Recommendations:

The national Davis-Bacon law, as well as the lower-level state prevailing wage laws, cost the taxpayers billions of dollars each year. With rigid craft-based job classifications and restrictive apprenticeship regulations, the ability of employers to hire and train unskilled workers is severely hampered. In many cases unskilled workers, often minorities, have been historically kept out prevailing wage projects.

Empirical evidence from Oregon, Michigan, and Pennsylvania show that prevailing wages are on average 25-40 percent higher than free-market wages. In 1997, the prevailing wage law in Ohio was no longer mandatory for school districts. It’s estimated to have saved Ohio taxpayers 10 percent annually.

If Pennsylvania were to make prevailing wages optional at the school district level, the Commonwealth could see savings of tens of millions of dollars annually. If it were eliminated at the state level, it would save hundreds of million of dollars more.

With prevailing wages much higher than free market wages many non-union contractors are put at a disadvantage when bidding on government contracts. Add to this the cost of paying fringe benefits they often simply pass on government projects altogether. This leads to less competition and higher costs for government construction which are ultimately borne by the taxpayer.

Issue Summary (Reviewed January 2011)
Mandated Wages: Living Wages

The Issue:

The phrase “living wages” refer to a super-high mandated wage—often 50 percent to 150 percent greater than the current federal minimum wage ($7.25). They usually require any business or firm that receives local government assistance to pay its employees the mandated wage (set by the local government). The key term is “government assistance” which can be a catch all. In its simplest form, government assistance is limited to contracts between a firm and a government agency. In its more complex form, it can include tax abatements, tax increment financing, direct subsidies, as well as any other indirect government assistance.

What We Know:

The poor are not getting poorer, as they are consuming more goods today than they were thirty years ago. Non-monetary benefits have also increased by one-third over the last two decades. As far as “burger flippers” are concerned, a U.S. Bureau of Labor Statistics report noted that on average, those in the fast food industry earn more than the prevailing minimum wage and approximately 70 percent are teenagers. The best remedy for increasing one’s wages is education, experience and tenacity—not government intervention.

Who supports mandated wage floors? Mandated wages have the support of labor unions as well as activist groups such as ACORN (Association of Community Organizations for Reform Now). ACORN has been successful in getting these ordinances passed in many communities in California including their home community. Ironically, after it was passed, ACORN applied for an exemption from the law so they would not have to comply. They argued that they would have to reduce their workforce and would be unable to continue to operate at the same level.

Labor unions, specifically public sector unions, have viewed mandated wages as a way to push up all wages and not just the entry level ones. If the entry level wage were raised then all wages would rise by an equal amount to keep the hierarchy intact. This allows them to gain wage increases without striking or bargaining. It also helps them stem the tide of privatization among state and local governments as an inflated minimum will negate any savings that would have been achieved by outsourcing to private contractors—thus preserving union jobs.

Measures like mandated wages send signals to a business community that local governments are not afraid to be an active regulator of business operations. This information may be enough to dissuade a firm from locating in such an environment. However, if they choose to operate in this environment and are subject to the mandate they more than likely will follow one of three courses: raise prices to cover the increased wage costs; reduce costs by (among other things) reducing the number of employees, or reconsider doing business with the city/county. Firms can also substitute away from low- skilled workers to higher-skilled workers with greater productivity, thus hurting the people that the mandate was intended to help. By stipulating that any firm doing business with the government pay the mandated wage, it will cause the number of firms bidding for local government contracts to fall, reducing competition, thus leading to higher contract prices which will be passed along to taxpayers in the form of higher taxes.

Recommendations:

Mandated wages, such as the living wage, do not achieve the goal of reducing or eliminating poverty. Labor costs to firms increase when required to raise wage rates which forces them to make decisions. They can reduce labor costs by reducing, among other things workers themselves; cease to do business with the government imposing the new wage; or pass the costs along to customers. Moreover, as workers’ incomes rise they may become ineligible for government subsidies such as food stamps, Medicaid, or income tax credits, reducing or offsetting the benefits of the wage hike.

Since raising the wage rate is not a cure for poverty, what alternatives are out there? A more direct approach, used by Harvard University, is to extend benefits such as health care to part-time employees. They also helped lower-skilled employees by offering literacy and GED courses. Other alternatives include increasing earned income tax credits, child care, job training and education, and housing assistance.

Issue Summary (New January 2011)

Mandated Wages:  Prevailing Wages--City and County

The Issue:

In January 2010 Pittsburgh City Council passed a prevailing wage bill for all workers on development projects that receive financial assistance from the government.  Allegheny County passed its own version in April 2010. 

Such market interference can be detrimental to the economic growth of the community as it forces firms to pay higher labor costs which are either passed back to the taxpayers or to leave the affected area and abandon jobs.  At the very least it sends a negative signal to current and future companies that the government is willing to meddle in the marketplace creating one more impediment to be overcome.  In areas already lagging most of the nation in economic growth, mandated wages should be eliminated.

What We Know:

The phase "government assistance" can be a catch all that includes among others:  direct contracts, economic development subsidies, abatements, or tax increment financing.  The mandates are often called "prevailing wages" or "living wages" and are set well above any state or federal minimum wage.  They can include payment for wages as well as additional compensation for the absence of benefits. 

The newly enacted laws require any project with $100,000 of government assistance (County, or City and authority spending respectively), including infrastructure, to a prevailing wage requirement.  The actual amount of the prevailing wage would be calculated by the respective Controllers who would need to collect wage data on all affected job classifications.  Pittsburgh's law requires the City, as well as firms receiving City subsidies or contracts to also pay the prevailing wage.  The implications on economic development efforts as well as on the City's own budget can be enormous.

Prevailing wages are market interference of the worst kind.  They represent a tax on select businesses by forcing them to raise wages.   The affected businesses have little recourse.  They can either raise their price to cover the new costs or reduce the number of employees they hire. 

If they operate in a competitive market, raising the price may not be an option and they will be forced to internalize the costs or perhaps shut down.  If they have a government contract, they can pass the cost back to the government in the form of higher bids-which of course gets passed back to the taxpayers.  Such wage requirements can have a negative effect on the number of jobs and the quality of the work product. 

Proponents argue that companies receiving city subsidies have an obligation to pay prevailing wages.  However, keep in mind that some investors utilize the subsidies because high taxes and poor regulatory and labor climates require them to use public assistance if they hope to have a viable enterprise.  Having a government body change the rules after the fact sets a bad precedent and may keep future firms from entering the city.  Imposing a prevailing wage can largely offset the benefits from the subsidy received and make little sense in that regard.  Subsidies are intended to get investment that would not otherwise occur. 

Recommendations:

Prevailing wages are a long-term disaster for any city wishing to implement one.  While done under the guise of social justice, they might boost wages for a select few but they will ultimately cost more jobs for current workers as they are let go in favor of ones with higher productivity or chase away current or future firms.  Furthermore, as workers' incomes rise they may become ineligible for government subsidies such as food stamps, Medicaid, or income tax credits, reducing or offsetting the benefits of the wage hike. 

Alternatives to mandating wages are education and training.  Those with more education and training tend to earn more than lower skilled workers.  Other alternatives include increasing the earned income tax credits, child care, and housing assistance.