The Building Tradesman Newspaper

Friday, February 26, 2016

High road or low road? New prevailing wage study finds repeal lane is filled with pitfalls

By The Building Tradesman

One of the most comprehensive academic studies of the economic, social and project cost impacts related to state prevailing wage laws was released Feb. 9, and the results might cause proponents of repealing Michigan's law to think twice about their ongoing petition effort.

OK, that's not gonna happen: proponents of prevailing wage repeal have never let good research get in the way of their narrative that lowering the wages of construction workers will always lead to greater taxpayer savings on public construction projects.

Still, the insight unearthed by researchers from the Illinois Economic Policy Institute, Colorado State University-Pueblo, and Smart Cities Prevail is compelling in their support of the societal good that's fostered by state prevailing wage laws. The study found that "weakening or repealing prevailing wages does not reduce construction costs, but increases poverty and decreases economic activity. In fact, weakening or repealing state-level prevailing wage laws in the 25 states that currently have strong or average wage policies would have negative economic, fiscal, and social impacts on the U.S. economy."

The report is titled “The Economic, Fiscal, and Social Impacts of State Prevailing Wage Laws: Choosing Between the High Road and the Low Road in the Construction Industry.”

Researchers utilized a modeling software to compare states, assessing the impact of prevailing wage policies on a variety of economic and social factors, including: job creation, wages, worksite productivity, rates of in-state contracting, impacts on taxpayers, reliance on government assistance programs, and effects on communities of color and veterans.

The study is also the first that looks at the existing body of research that has been presented on both sides of the prevailing wage issue regarding overall project costs. According to the report, 75 percent of recent peer-reviewed studies find that construction costs are not affected by the prevailing wage.

"We found that the non-peer reviewed studies that suggest cost savings from prevailing wage repeal tend to focus exclusively on wage differences," the report said, "which ignore the fact that prevailing wage standards dramatically reduce material and fuel expenditures and reliance on taxpayer-funded welfare assistance, while increasing worksite productivity.”

The study's definition of the purpose of prevailing wage borrows from the intent of the original federal law, which was adopted in the 1930s. "The main purpose of prevailing wage laws," the study says, "is to protect local construction labor standards from distortions associated with publicly funded construction. Large infusions of government spending into an area, along with a contract award process that favors the lowest bidder, may attract contractors from areas where construction worker wage rates are lower and where the industry under-invests in skills development.

"Competition between these out-of-area and local contractors may result in the erosion of local compensation standards and the labor market institutions designed to develop and enhance workers’ skills and safety. Prevailing wage laws create a level playing field for all contractors by ensuring that public works expenditures maintain and support local area standards."

Other key findings from the study include:

*Prevailing wage laws close the income gap in construction: "Construction workers in prevailing wage states earn 17 percent more than their counterparts in states without PWL policies," the study found. "Repealing prevailing wages is associated with income declines of up to 8 percent, pushing low earners onto public assistance."

*Michigan is considering repeal of prevailing wage (via the use of a petition drive). "Research shows that the state economy would decrease by $1.5 billion, lose over 9,700 total jobs, and lose over $55 million in tax revenue from the leakage of construction expenditures to firms in neighboring states," the study said.

*Prevailing wage laws reduce reliance on public assistance. States with weak or no prevailing wage laws currently spend $367 million more per year on food stamps and Earned Income Tax Credits for blue collar construction workers than states with average/strong prevailing wage laws.

*Prevailing wage laws increase income tax contributions. Construction workers in states with strong/average prevailing wage laws contribute $5.3 billion more in federal income taxes (on average after credits and deductions) per year than their counterparts in weak/no law states."

*Prevailing wage repeal strains public budgets. "If all 25 states with strong/average prevailing wage laws weakened or repealed their policies, the loss in federal income taxes and added public assistance expenditures would cost American taxpayers at least $4 billion more every year," the study found.

The Mackinac Center for Public Policy, a conservative think-tank, for decades has pushed for the repeal of prevailing wage laws in Michigan and elsewhere. A paper they published in 2013 said that the law inflates Michigan's construction costs "by 10 to 15 percent." Citing an Anderson Economic Group study, the Mackinac Center says Michigan can save $224 million every year in school construction costs with repeal.

However, the overwhelming number of studies reviewed by academic peers don't support taxpayer savings at all, the Illinois Economic Policy Institute, Colorado State University-Pueblo, and Smart Cities Prevail study finds. "Why don’t prevailing wages increase construction costs?" the study asked. "First, labor costs are a low (and declining) percentage of total costs in the construction industry – approximately 23 percent of all building costs in the U.S.

The study said contractors also reduce expenditures on materials, fuels, rental equipment, and profit when wages are higher. Finally, peer-reviewed research indicates that when wages increase in the construction industry, contractors respond by utilizing more capital equipment and substituting skilled workers for less-productive counterparts.