THE REAL FACTS ABOUT PREVAILING WAGE LAWS
New study finds no evidence that repeal of wage laws saves taxpayers' money
A national debate is brewing surrounding the Davis-Bacon Act and prevailing wage laws. Many opponents of the laws feel that significant reductions would be realized if the government repealed these laws on both state and national levels. But a breadth of research is appearing that proves this theory false. A recent study by University of Utah Professor Peter Philips, the country's pre-eminent labor economist, reveals that repealing such laws will not produce labor cost savings, but will reduce worker salaries, benefits, and training and increase the number of worker injuries.
The History
In 1931 the U.S. Government enacted the Davis-Bacon Act to establish local labor rates within construction projects contracted by the federal government. This act requires public-works contractors to pay trades people no less than the wages that prevail on similar projects within the same region. Included in these specifications are worker benefits, such as health insurance and pension contributions. Similar prevailing wage rate legislation was ultimately adopted by most states for bidding on state and local government projects.
- Prevailing wage laws are rooted in a philosophy of economic growth and were enacted to:
- Encourage contractors to compete for government work based on skill, safety and efficiency rather than by cutting wages.
- Allow good contractors to pay fair wages and hire well-qualified workers.
- Promote the use of the local labor force, over cheaper labor that can be found elsewhere.
- Keep labor costs low by employing skilled labor to avoid cost overruns and safety problems.
- Improve working conditions for all workers.
- Promote a strong local economy by allwoing local contractors with local workers to compete with out-of-region firms.
What Does This Really Mean?
- Use of prevailing wage rates actually saves taxpayers money by reducing public health costs and strengthening the local economy and tax base.
- Prevailing wage laws provide significant benefits to workers, local economies and government efficiency. And now a 15-state study by Dr. Peter Philips of the University of Utah has found no significant differences in labor costs between states with or without prevailing wage legislation. His study, conducted on behalf of the State of Kansas, shows that prevailing wage laws promote construction industry productivity and reduce worker injuries. Use of prevailing wage rates actually saves taxpayers money by reducing public health costs and strengthening the local economy and tax base.
A Kansas Case Study
Dr. Peter Philips' 1998 study of rates in 15 Great Plains states was conducted to examine:
- 1) how the repeal of Kansas' prevailing wage law in 1987 impacted labor and construction costs, and
- 2) how public construction costs compare in states with and without prevailing wage laws.
It was prompted by claims that the State of Kansas would save anywhere between 6 and 20 percent by repealing the prevailing wage law. The meticulously documented study compares Kansas' construction costs to that of 14 surrounding Great Plains states, nine states with prevailing wage laws and five states without.
The study focuses on school construction costs because:
- 1) They are a major part of state and local public construction expenditures,
- 2) Elementary, middle and high school building types can be easily compared, and
- 3) More schools are built than any other single type of government building, and therefore offer enough data to make statistical comparisons.
- 2) Elementary, middle and high school building types can be easily compared, and
The study analyzes the building costs for all three levels of schools - elementary, middle and high schools. An analysis was done of 365 elementary schools, 238 middle schools, and 187 high schools built in prevailing wage law states. And 81 elementary schools, 30 middle schools, and 35 high schools constructed in states with no prevailing wage laws were examined.
Highlights of the Study
See a full breakdown of school cost comparisons in the table below
- The average square foot construction cost on new elementary schools built in states with prevailing wage laws is $76.86 - compared to $76.23 in states with no prevailing wage laws, a difference of just $.66 a square foot.
- The average square foot construction cost on middle schools built in prevailing wage law states is $70.02 - compared to $72.35 in states with no such law, a difference of $2.33 a square foot.
- The average square foot cost of high schools built in prevailing wage law states is $72.87 - compared to $70.72 in states with no law, a difference of $2.15 a square foot.
- According to Philips, the difference of $.66, $2.33, and $2.15 per square foot are "not statistically significant."
*Reprinted by special permission of Peter A. Cockshaw, publisher of Cockshaw's Labor News+Opinion
Hidden Costs to Local Taxpayers
While Dr. Philips' study indicates no cost savings from abolishing prevailing wage rate legislation, it does point out hidden costs borne by local taxpayers and communities. States without prevailing wage rates experience reductions in local sales and income tax revenues, forcing increases in taxes or loss of essential services. Non-prevailing wage states also typically suffer increases in public health costs due to a drastic reduction in health insurance coverage by contractor employers coupled with an increase in on-the-job injuries. These public health costs also become the burden of local taxpayers. Additional hidden cost implications are highlighted below:
While cost savings to taxpayers in Kansas did not pan out, the loss in income by craft workers did. Kansas craft workers' wage incomes fell 11% from 1987 (the year of the repeal) to 1991. This amounts to a decline in average wages from $25,573 to $22,807.
- In the nine Great Plains states surrounding Kansas that retained their prevailing wage laws, wage income fell by only 2%.
- Apprenticeship training in Kansas fell 38%. Minority apprenticeship training fell 54%.
- Total employer contributions to pension and health funds declined 17% - from an average of $20 million per year to $16.6 million.
- While almost all construction workers covered by collective bargaining in Kansas receive health insurance and employer pension contributions, only 10% of workers in the open sector receive pension coverage and only 4% receive health insurance from their employer.
- Worker injuries rose 19% after the repeal, and cases of serious injuries rose 21.5% after Kansas repealed its prevailing wage law.
Labor Costs
The savings did not pan out because they were based upon hypothetical calculations. These figures were based on the assumption of very high estimated labor costs (50% of total construction costs) to the total project costs. Lawmakers assumed less labor costs without prevailing wage laws, but did not take into account any reduction in productivity. Increases in injuries and decreases in training, led to cost increases due to poor workmanship.Further, labor costs are not 50% of total costs, labor costs are typically only 25 to 30% of total building construction costs and even less on street and highway construction. In fact, in the case of the states compared in the Kansas study the mean labor cost is 18.96% of total construction costs for prevailing wage states - less than the 19.44% mean labor cost for states without a prevailing wage law.<>
What Happens to Training
One interesting finding is the reduction of training programs. In organized construction all union contractors must fund training, but in a cut-throat bidding environment, there is an incentive to avoid long-term costs to get a contract. Therefore, a worker who wants training must pay out-of-pocket, whereas in the union sector, workers do not pay for training. Thus in the open shop sector there are two incentives not to train. One being on the part of the employer who could end up absorbing the cost of training an apprentice that later goes to work for a competitor; and second, workers are less likely to seek training if they have to pay for it themselves.
For example, a study of apprenticeship training in Northeastern Ohio reveals that
574 people registered for union construction apprenticeships in 1995. Additionally,
of those who entered the classes of 1989, 1990 and 1991, 48% of the union apprentices
graduated by 1995 with another 23% still actively enrolled in classes and 29% cancelling,
whol amoung non-union apprentices, only 29% had completed classes, 5% were still actively
enrolled and 61% had cancelled.
Other Similar Findings
The findings of the Kansas study are consistent with other similar surveys. According to another study conducted by Professor Philips comparing five "prevailing wage" states (New Mexico, Texas, Oklahoma, Wyoming and Nevada) to four "no law" states (Arizona, Utah, Idaho and Colorado), costs are significantly less in prevailing wage states.
- Elementary schools cost $6 less per square foot (psf) in the five state group with prevailing wage laws.
- Middle schools and high schools cost $11 psf less in "have law" states.
- Warehouses cost $35 psf less in "have law" states while office buildings cost $2 more in the same states.
The findings indicate prevailing wage laws confer an 8% cost advantage to states on average.
Another University of Utah study that examined nine states that repealed prevailing wage laws concluded:
- Construction worker earnings declined by at least $1,477 per year on average.
- State income and sales tax revenues declined.
- Construction training fell by 40% and even more among minority workers.
- Occupational injuries rose by 15%.
- Cost overruns escalated.
Sources and References for this article:
Peter Philips, Ph.D., "Kansas and the Prevailing Wage Legislation", prepared for the Kansas Senate Labor
and Industries Committee. (February 20, 1998).
Cihan Bilginsoy, Ph.D and Peter Philips, Ph.D., "Apprenticeship Training in Ohio", Economics Department,
University of Utah (1997).
Peter Philips, Ph.D., "Square Foot Construction Costs for Newly Constructed State and Local Schools, O
ffices and Warehouses in Nine Southwestern and Intermountain States 1992-1994", prepared for the Legislative
Education Study Committee of the New Mexico State Legislature (September 6, 1996).
Peter Philips, Garth Mangum, Norm Waitzman, and Anne Yeagle, "Losing Ground: Lessons from the Repeal of
Nine Little Davis-Bacon Acts", Working Paper Economics Department, University of Utah (February 1995).