The Keystone Research Center (KRC) recently released a report touting the benefits of Pennsylvania’s prevailing wage law. The report appears to be timed to offer arguments against a group of bills currently moving through the Legislature that are aimed at reducing dramatically the effects of the prevailing wage requirement on government funded or assisted projects. Principal findings of the KRC study are; (1) eliminating the prevailing wage law will lower the quality of construction and, (2) will not reduce construction costs. This Policy Brief will demonstrate that neither assertion is correct.
Bear in mind that, for all intents and purposes, prevailing wages are the union wage rates and that virtually all non-supervisory employees on these covered projects are union members. Thus, not only are union wages paid but union benefits are also part of the compensation package.
The crux of KRC’s argument is that the prevailing wage requirement ensures quality in construction-or as they put it, “you get what you pay for.” In the paper, KRC cites other research that found no significant differences in costs between prevailing wage law covered construction and non-prevailing wage (i.e., market determined wages) construction ostensibly because higher wages in construction tend to reflect higher productivity. Unfortunately, for KRC’s arguments, they neglected-or missed-a very important study in their literature survey, namely, a report completed in 2002 by the Ohio Legislative Service Commission (LSC)[1].
In 1997, Ohio changed its prevailing wage law to give school districts the option of an exemption to the prevailing wage requirement in construction projects. Many districts took advantage of the new law and chose not to go with prevailing wages while some continued to use the prevailing wage requirement. The LSC was charged with studying the effects of not using prevailing wages including specifically the effect on quality of construction. To carry out the assignment, the LSC conducted two separate surveys of school districts, one in January 1999, and a second in August 2000.
LSC’s survey findings are very revealing and quite remarkable. In the 1999 survey 187 districts responded to the question regarding comparative quality of construction. Of those respondents 35 percent indicated quality was higher while 65 percent reported no difference in quality between prevailing wage construction and non-prevailing wage (market determined wages) construction. Only one district reported lower quality from using of non-prevailing wage construction.
In the 2000 survey the “LSC received responses from 357 districts, including responses from 227 districts that indicated they had construction or renovation projects between January 1999 and September 2000 that required competitive bidding. Of these 227 districts, 196 answered the…question about quality.” 97 percent of respondents reported the level of quality of market wage projects either improved (6 percent) or remained the same (91percent) compared to prevailing wage projects. Only five districts noted (2.5 percent) lower quality. The LSC report concluded that the users of the buildings were satisfied with the results of construction in the post-prevailing wage period. “As perceived by the responders, the exemption does not appear to have decreased the quality of school construction,” the study noted.
The LSC also found that school districts saved nearly $500 million, with an average savings on construction spending of 10.7 percent. Obviously the Ohio Legislature was satisfied with the results of the study because the exemption remains in place nearly a decade later. This report certainly deserved a mention in the KRC study that makes such a strong claim that quality of construction will fall if prevailing wage labor is not utilized.
On the issue of comparative costs between prevailing and market based wage projects, KRC says the following; “Since labor compensation in Pennsylvania accounts for only 29% of total costs (less on many capital-intensive public projects), the claim that prevailing wage laws raises costs by 30% is implausible. To generate savings of 30 percent would require employees to work for free in the absence of a prevailing wage law, while also achieving the same level of productivity.”
There are two critical points in response to this statement. First, the KRC is citing the U.S. Department of Commerce, Economic Census of Construction, 2002 as the source of the claim that prevailing wages raise costs by 30 percent. This is an objective/official source and by inserting this finding into their paper, they are calling into serious question their claim that prevailing wages do not increase construction costs. Most prevailing wage effect studies note that savings from using market based wage labor can reach 10 percent or higher (as mentioned above in the Ohio study). Secondly, the Department of Commerce finding of 30 percent cost increases from prevailing wages undoubtedly refers to labor costs and not the entire project cost. Thus, if labor costs constitute 29 percent of total project cost as KRC suggests, then a 30 percent higher cost of labor would boost project costs by about 10 percent-more on projects with a higher labor component, less on projects with a smaller labor component of total costs. The ten percent figure is close to what the LSC in Ohio found for school construction.
Here’s the problem for prevailing wage defenders: while 10 percent does not sound like a huge amount, on billions of dollars’ worth of government construction and assisted construction each year, the added, unwarranted bill for Pennsylvania’s taxpayers and developers is hundreds of millions of dollars.
Then too, it is important to note the other costs imposed by the prevailing wage law the KRC study neglects to mention. In a union environment, work rules can stifle or limit management discretion and flexibility in assigning worker tasks, thereby forcing contractors to hire more people than would be necessary in a non-union environment. For example, a carpenter would be forbidden to assist an electrician and vice versa. As we have seen in other unionized sectors of the economy, such as public transportation, restrictive work rules push costs up and lower efficiency.
Finally, there is a basic objection to government mandated wages such as the prevailing wage requirement. The law forces taxpayers to pay more for construction than a purely market based competition would cost. The law also prevents non-union workers from having an opportunity to work on projects their taxes are helping pay for. How ironic is that? And how unfair?
Prevailing wages are nothing more than a special privilege granted by government to a special interest. The public is being poorly served by the law and it should be eliminated.
