The Building Tradesman Newspaper

Friday, November 10, 2017

What do we know? Prevailing wage laws aren't a burden for U.S. taxpayers

By Marty Mulcahy, Editor

Yet another study has supported the case for retaining construction prevailing wage laws.

Released on Oct. 26, the paper titled Prevailing Wage Laws: What Do We Know? takes a bit of a different take on the multitude of academic, peer-reviewed studies that have been done on prevailing wage over the years. Instead of directly analyzing the costs and benefits of prevailing wage laws, it analyzed past studies themselves. 

Through a critical analysis of the related academic literature, the group's paper concluded: 

*"The  most  methodologically  advanced  studies  indicate  that  prevailing wage laws do not increase public construction costs, although some exceptions—such as public housing in California—may exist."

*"Although the number of studies is limited, recent research indicates that prevailing wage laws promote worker training and increased safety."

*"While  the  original intent of  prevailing  wage  laws  remains  open  for  debate,  the  most advanced  studies  on  the  topic  indicate  that  these  regulations  do  not  currently  have  a discriminatory effect against African-Americans."

The paper was prepared by Dr. Kevin Duncan, PhD, of the Hasan School of Business at the Colorado State University- Pueblo, and Dr. Russell Ormiston, PhD, of the Department of Economics

Allegheny College. Their 31-page work was presented by the Institute for Construction Economic Research, a group based in East Lansing that has some union contractor association representation on its advisory board. The group's 20-member "research faculty" includes academics from universities and colleges all over the country.

"The study by Kevin Duncan and Russell Ormiston encompasses a comprehensive review of peer-reviewed research and concludes that most credible studies indicate that prevailing wage regulations do not have a statistically significant impact on construction costs," said Sean McGarvey, president of North America’s Building Trades Unions (NABTU). “In order for our brothers and sisters to prepare to rebuild America’s crumbling infrastructure, our nation’s elected officials must protect community wage and benefit standards. That is, and has been, a topline priority of our unions’ leadership.

"We’ve long advocated the value of prevailing wage laws – as they benefit each party: the workforce, the developers, and the general public. In regards to its findings, (the report) is more than fair. By highlighting peer-reviewed, academic findings – and identifying the inherent shortcomings in many non-academic studies – the Institute found value in prevailing wage laws. These laws ensure qualified, safe, highly skilled craft professionals on public projects and protect local communities from the deterioration of local labor standards.”

The What Do We Know? paper acknowledges the ongoing disagreement among the academic community about whether or not there are financial benefits to taxpayers in repealing prevailing wage laws. Michigan, of course, is at the center of this argument, with the pending conclusion of a statewide prevailing wage repeal petition effort that could spell the end of the Great Lake State's law. 

"The lack of consensus among researchers, however, is mostly attributable to differences in empirical methodology  and  scientific  rigor," the study's authors say. "To improve the clarity of future  public policy debates on prevailing wage laws, this paper summarizes the current state of research on these policies, highlighting  recent academic findings and identifying empirical shortcomings inherent in a number of oft-cited non-academic studies."

Specifically, the What Do We Know? writers say "while numerous studies claim that prevailing wage laws substantially increase public construction costs, most of the papers arriving at this conclusion rely on a flawed empirical approach—the 'wage differential' method—that demonstrates a clear misunderstanding of construction labor markets." Such a method incorrectly compares the prevailing wage rate in a given area with an arbitrary lower rate that is not arrived at with statistically significant evidence. 

"As a result," the paper says, "the  wage  differential  approach rules out the potential cost offsets attributable to contractors hiring fewer and more skilled workers or substituting capital for more 
expensive labor."

Here is an example. The authors say a 2015 study of the purported benefits of prevailing wage repeal in Michigan illustrates this flawed, overly simplified approach. They cited a study by Rosaen and Taylor which "estimated the cost impact of Michigan’s prevailing wage law by multiplying (a) the wage premium associated with prevailing wages relative to lower-cost market alternatives (25 percent) and (b) the percentage of construction costs attributable to wages and benefits (24 percent). The subsequent product—6.1 percent—is  touted  as  the  increase  in  public  construction  costs  attributable  to  the  presence  of  a prevailing  wage  law;  multiplying  that  by  the  $21  billion  spent by the state of Michigan on applicable school construction  between  2003 and  2012, the authors posit that the state’s prevailing wage law cost taxpayers an additional $1.267 billion over those ten years. A number of other non-academic studies utilize variants on this approach; they typically report that state and  federal  prevailing  wage  laws  increase public construction costs on all projects by 8-36 percent."

It is notoriously difficult to measure and develop metrics for the construction industry, with its changeable locations and migrant workforce. Prevailing wage repeal proponents have maintained that taking away a wage floor will automatically save taxpayers (10?, 15?, or 36? percent) in labor costs on public buildings. Prevailing wage proponents decry that argument as a complete oversimplification of the construction market. They say that such an argument doesn't take into account cost efficiencies brought by higher-paid, higher-skilled workers and a safer workforce, or that a better quality job will lead to less maintenance down the road. 

Some other highlights from the paper:

*"A  second  methodological defect of the wage differential method is that most studies compare prevailing wages to the average wage for all construction workers in a state, including those working in residential construction. But residential construction workers are typically drawn from a different subset of craft workers—who are typically less skilled and earn less—than those employed  elsewhere  in  the  construction  industry."

*So what scientific method analysis works best for studying prevailing wage? The authors say eight out of the last nine major academic studies in the U.S. on the subject have correctly utilized “regression analysis” to control for many of the differences inherent in construction projects (e.g., square feet, season, number of stories, type of project – elementary or high school?)  and therefore isolate the cost differential that could be attributable to the presence of a prevailing wage law.

"It is revealing that every academic study of the cost effects of prevailing wage laws in the last 15  years has employed regression analysis," the What Do We Know? authors said. "It is additionally compelling that seven of the eight studies that examined public school construction using this approach failed to uncover a statistically significant link between prevailing wage laws and school construction  costs; this includes four of five peer-reviewed articles."

*The authors cited a study of Ohio school construction projects between 2000 and 2007, after Ohio saw public school construction exempted from the state's prevailing wage law. That study looked at 8,093 bids, and after comparing "the bid cost per square foot between union  contractors—who  presumably  pay the  highest  local  wage  rates—and  nonunion  contractors,  the author found no statistically significant difference between the bids statewide. The only significant difference occurred in an examination of Southern Ohio, with the author finding that bids from nonunion contractors were significantly higher  than their union counterparts."

“In today’s U.S. construction market," McGarvey said, "we far too often witness a ‘race to the bottom’ mentality, and that’s nothing short of unacceptable. Our members represent the safest, most highly skilled and productive workforce in the world, and should prevailing wage laws continue to be gutted across the country, contractors will be further hard-pressed to find qualified, skilled workers to accept jobs with unfair wages and little to no benefits. This study affirms NABTU’s longstanding argument that prevailing wage laws are vital in the construction industry – and, more importantly, when these laws are protected, America’s middle class is empowered."