Prevailing wage doesn’t cost taxpayers, it protects them

Dale Belman is a professor in the School of Labor and Industrial Relations & Department of Economics at Michigan State University.

Although it would be polite to characterize the current effort in the Michigan legislature to repeal the prevailing wage law a “debate,” it is more honestly described as a vigorous political effort devoid of thoughtful consideration of the strengths and weaknesses of these laws.

While the strategy for repeal appears to have shifted from the Capitol to a citizen petition drive, it’s worth looking at the scholarship on the issue as the effort goes forward.

The large savings on public construction touted by those driving the repeal are, according to a reports of the Legislative Fiscal Bureau of Wisconsin (2015) and the Minnesota Office of the Legislative Auditor (2007), the product of deeply flawed methods. Reviewing more careful studies, both the Wisconsin and Minnesota reports conclude that prevailing wage laws have slight to no effect on the costs of construction. The Minnesota report finds that prevailing wage laws increase craft worker wages and benefits and training; the Wisconsin report does not address this issue.

Why do we have prevailing wage laws? These laws mitigate the consequences of the low bid requirement in public construction. Both private firms and public bodies seek multiple bids for construction projects. Private firms evaluate those bids on the prices offered by construction firms, but also on what the bidders offer, and on their reputation and experience. A private firm awards the project based on their assessment of the best value. Firms that use innovative engineering, advanced management practices and well-trained and -compensated labor can compete effectively because, while they may not be the low bidder, they offer value relative to their bid price.

The award decision for public construction is very different. Laws intended to prevent corruption during the bid process require that projects be awarded to the lowest responsible bidder. “Responsible” refers to the ability of the construction company to obtain an insurance bond for the project, it has little to do with real capacity of the bidder. The public body is not allowed to consider differences between the quality of the bids, the reputation or even the public body’s experience with the contractor. The project simply goes to the lowest bidder.

This system has consequences for public construction and the construction industry.

Construction firms are pushed to reduce bids as much as is possible. Sometimes this results in innovative approaches to projects; however, too often it results in exploiting weaknesses in the bid specifications by using inferior materials, doing substandard work, or increasing charges with after the fact change orders. It also places great pressure on construction firms to cut labor costs.

What does cutting labor costs mean? For some firms it means finding the best labor, paying a competitive wage, and using workforce skills to deliver a low cost project. Too often, it means seeking out the cheap labor that may or may have the skills for project tasks.

Alternatively and as documented in the study “The Social and Economic Cost of Employee Misclassification,” significant numbers of construction firms cut labor costs by misclassifying employees as independent contractors. This allow them to avoid paying income taxes, Social Security, Medicare, Workers Compensation and Unemployment Insurance.

As reflected in the recent Indiana law banning cash payments in construction, some firms seek to cut labor costs via undeclared cash payments.

Finally, this year the Pew Research Center documented the widespread use of undocumented workers in construction. These workers are particularly vulnerable to underpayment and wage theft because of their legal status. Of course, firms that engage in such practices provide little training and low safety standards.

Publicly funded construction comprises 20 to 30 percent of all construction expenditures. Because of the importance of public construction to the industry, the low bid system places great pressure on the entire construction industry to keep costs low. Prevailing wage laws serve the interests of the public, as well as construction employers and craft workers, by directing competitive pressures generated by the bid system toward social ends.

By cutting off the easy route to reducing costs, these laws direct firms to compete on the basis of innovative engineering and forward-looking management practices. By setting the wages and benefits paid on public construction at the level paid in the private sector, it prevents firms from competing by skirting employment laws. It establishes that firms will pay the wages, health insurance, pension and training benefits paid to similar workers in the private sector. It encourages training by incorporating training costs into the prevailing wage and allowing apprentices to be paid a lower wage.

These laws also save the public money by reducing the number of low paid, unbenefited construction workers using publicly financed services, particularly publicly financed emergency health care.