Defense of Prevailing Wage Law Falls Short

Member Group : Allegheny Institute

(October 6, 2011)–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

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

In the 2000 survey the "LSC received responses from 357districts,
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 (6percent)or remained the same (91percent) compared
to prevailing wage projects. Only fivedistricts 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

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.

[1] –

Jake Haulk, Ph.D., President
Frank Gamrat, Ph.D., Sr. Research Associate

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