Michigan has joined a growing list of states that are repealing their prevailing wage laws. With this latest reversal, 24 states no longer require public contractors to pay prevailing wages—wages that are calculated by the Labor Department and are generally higher than average—allowing wages to be determined by economic conditions instead of central planners.
Prevailing wage laws are derived from the federal Davis-Bacon Act of 1931, which mandates that federally-contracted workers be paid “prevailing wages” on projects over $2,000. These prevailing wages are intended to match the local cost of labor, based on the occupation and location of the work. Though the law’s intention was to protect American workers from immigrant labor during the Great Depression, the law has artificially raised wages, decreased competition, and boosted union power.
These laws increase compliance costs and implement a wage floor that discriminates against new entrants into the industry. For example, Michigan contractors previously had to sort through over 500,000 different rules for lawful payment. Unions that have promoted these policies are at an advantage because extensive paperwork is standard business practice. The burden of having to calculate different labor costs for government and non-government projects discourages many independent contractors from bidding.
Lower-skilled and younger workers earn less for their services to compensate for their lack of experience, but under prevailing wage laws employers cannot pay less than the mandated rate. Therefore, low-skill workers are unlikely to be hired when competing with more experienced workers.
Historically, prevailing wage laws have also resulted in discrimination against African American and immigrant workers. A recent study by David E. Bernstein of the Antonin Scalia Law School at George Mason University concluded that these restrictions disproportionately hurt minority contractors since African Americans and immigrants tend to be less skilled. Passage of the Davis-Bacon Act was partially driven by a fear of African American workers driving down wages, and minorities continue to feel the negative effects of federal and state prevailing wage laws. Nearly 98 percent of African American and Hispanic construction companies are non-union, so wage rate restrictions that favor unions hit these communities the hardest.
Beyond increasing barriers to entry and excluding minority workers, prevailing wage laws raise budgetary concerns. The Congressional Budget Office estimates $13 billion could be saved over the next ten years if the Davis-Bacon Act was repealed, and many outside organizations consider this to be a conservative estimate. A Heritage Foundation study by James Sherk, now at the White House, argues that prevailing wages are 22 percent above market rates, costing taxpayers $10.9 billion annually.
In the current political climate, complete repeal of prevailing wage laws is likely only politically feasible at the state level. States that successfully repealed prevailing wage laws had to fight against union pressure, and the majority of these states have passed other labor-freeing measures such as Right to Work laws. Intermediate policy changes to mitigate the worst parts of the Davis-Bacon Act are the best way to approach compromise at the federal level.
Two policy changes would be particularly helpful.
First, wage rates should be calculated through the Bureau of Labor Statistics (BLS) rather than the current practice of leaving these determinations to the Wage and Hour Division (WHD). Both the BLS and the WHD are located within the Department of Labor, but only the former uses a 400,000-establishment sample size and methodological precision. The WHD produces results that tend to be high because the survey’s complicated design discourages small and medium-sized contractors from reporting, and the information is often outdated. Representative Paul Gosar [R-AZ-4] sponsored a bill to change data collection from WHD to BLS in February 2017, and Senator Jeff Flake [R-AZ] introduced a similar bill in May 2017. Neither bill has been voted out of committee.
Second, a tiered-system that sets different wage baselines depending on work experience is also needed. Not all workers are equal when it comes to experience and quality of work, so firms should not have to pay them the same. Well-established laborers are generally able to charge more for their services because they have more skills and a good reputation. With prevailing wages, contractors will not hire newer employees, as these workers would not be worth the same rate as their experienced counterparts.
Implementation of these changes would benefit taxpayers both at the federal and state levels while simultaneously opening industries to more competition, encouraging innovation and efficiency. By starting with small changes, the United States can gradually move towards the optimal system in which the availability of labor, instead of government price charts, determines the pay scales of public construction projects.
Stephen Vukovits is a contributor to Economics 21. Follow him on Twitter @svukovits.
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