A U-T San Diego editorial attacked a recent proposal to expand the city's prevailing wage law to all city projects that are “public works,” claiming it would increase the cost of projects and thereby increase the cost to taxpayers. However, the editorial failed to note that a growing body of research has found that prevailing wage laws do not significantly increase government contract costs and provide other social benefits to workers and their families.
What Is A Prevailing Wage?
Economic Policy Institute: Prevailing Wage Laws Require Contractors To “Pay Their Workers A Wage That Reflects Wages Commonly Received In That Area.” According to a report on economic effects of prevailing wage laws, the prevailing wage is the wage that is commonly received in the area for similar work. These laws have been around for more than 100 years and the federal government has its own prevailing wage law -- the Davis-Bacon Act of 1931. [Economic Policy Institute, 7/3/08]
California Requires Payment Of Local Prevailing Wage On Government Contracts That Exceed $1,000 For Public Works Projects. A study conducted by the Office of the Independent Budget Analyst (IBA) for the City of San Diego on the effects of the new prevailing wage proposal explained that California already has specific criteria for prevailing wage which includes “hourly wage, usual benefits and overtime, paid to a majority of workers, laborers, and mechanics within a particular area”:
In government contracting, prevailing wage is defined as the hourly wage, usual benefits and overtime, paid to a majority of workers, laborers, and mechanics within a particular area. California law requires payment of locally prevailing wages (including employer payments for employee benefits) on state government contracts in excess of $1,000 for public works projects.
Under California law, a “Prevailing Rate” is comprised of three components: (1) the basic hourly rate paid on public works projects to a majority of workers engaged in a particular craft, classification or type of work within the locality and in the nearest labor market area; (2) the rate for holiday or overtime work, as specified in an applicable collective bargaining agreement, or otherwise included with the prevailing basic hourly rate; and, (3) the prevailing rate of employer payments for any or all programs or benefits for employees, their families and dependents, and retirees, as enumerated in prevailing wage regulations issued by the California Department of Industrial Relations (DIR).
Prevailing wage rates are derived from the hourly rate paid on public works projects to the majority of a particular craft's workforce who are located within the locality or nearest labor market area. If there is no single rate paid to a majority, then the single or modal rate being paid to the greater number of workers prevails. DIR wage rate determinations are issued twice a year in February and August. Wage determinations become effective 10 days after they are issued. [Office of the Independent Budget Analyst, 6/18/13]
New Proposal Would Create Prevailing Wage For All San Diego City Projects That Are “Public Works.” The Office of the Independent Budget Analyst explained that this new proposal would expand a prevailing wage law from just “water and/or sewer fund projects whose estimated construction costs exceed $10 million” to all City projects “within the meaning of the State prevailing wage law.” [Office of the Independent Budget Analyst, 6/18/13]
U-T San Diego Editorial Board Has Called The Prevailing Wage Proposal “Fiscal Insanity”
U-T San Diego: New Proposal On Prevailing Wages Would “Cost Taxpayers As Much As $26 Million Or More.” From the July 29 editorial urging the San Diego City Council to “vote 'no' on expanding 'prevailing wage'”:
The federal government requires that “prevailing wages” -- essentially meaning union-scale wage rates -- be paid on its public works projects. So does California's state government and many local governments. San Diego, too, requires prevailing wage rates on public works projects that receive any federal or state funding and on sewer or water projects of more than $10 million.
So why shouldn't it pay prevailing wages on all other public works projects? Simple. San Diego can't afford it.
The City Council's independent budget analyst reports that the capital budget for the year that began July 1 includes 190 construction contracts totaling $331 million. Only 21 percent of those contracts, totaling about $70 million, now require the payment of prevailing wages. The analyst's office estimated that if prevailing wages were to be required on the remaining contracts, it would cost taxpayers as much as $26 million more.
A $25 million hole has already been blown in the city budget, forcing the council to cancel plans to hire more police officers and increase library hours, because its pension board voted not to lower the city's payment to the already underfunded retirement system. Applying the prevailing wage requirement to all public works projects would be fiscal insanity. [U-T San Diego, 7/29/13]
Office Of The Independent Budget Analyst Study Finds Small Increase In Construction Costs
IBA Report: Prevailing Wage Requirement Would Increase Total Project Costs By 5 Percent. According to an analysis of the prevailing wage ordinance by the Office of the Independent Budget Analyst, the prevailing wage requirement is estimated to increase total project costs by 5 percent, amounting to $13 million. However, the report also noted that if costs increased by 10 percent, projects cost could increase by $26 million. [Office of the Independent Budget Analyst, 6/18/13]
IBA Mentions, But Does Not Analyze, “Worthy Social And Economic Policy Objectives Advanced By This Project.” The study by the Office of the Independent Budget Analyst notes there are “worthy social and economic policy objects advanced by this policy” including “promoting good middle-class jobs and wages for residents”:
Despite the potential project cost implications associated with prevailing wage requirements, the IBA acknowledges the worthy social and economic policy objectives advanced by this policy. Some of those objectives include promoting good middle-class jobs and wages for residents, developing paths to construction careers through required apprenticeship opportunities, and endeavoring to provide more work for local contractors/workers who will spend their wages locally creating positive economic multipliers. Additionally, some assert that prevailing wages deliver better work products to the City in a more timely and efficient manner. [Office of the Independent Budget Analyst, 6/18/13]
Other Studies Have Shown Few Effects On Construction Costs From Prevailing Wage Laws
Economic Policy Institute: Studies Find No Cost Impact On Public Construction Associated With The Implementation Of Prevailing Wage Regulations. An analysis of several studies discussing the economic effects of prevailing wage laws found that there was no significant cost impact on public construction projects but have found prevailing wage laws “can enhance state tax revenues, industry income, and non-wage benefits for workers” among other benefits:
At this point in the evolution of the literature on the effect of prevailing wage regulations on government contract costs, the weight of the evidence is strongly on the side that there is no adverse impact. Almost all of the studies that have found otherwise use hypothetical models that fail to empirically address the question at hand. Moreover, the studies that have incorporated the full benefits of higher wages in public construction suggest that there are, in fact, substantial, calculable, positive benefits of prevailing wage laws. [Economic Policy Institute, 7/3/08]
Missouri Study Found Prevailing Wage Laws “Do Not Raise The Cost Of Construction.” A study conducted by the Department of Economics at the University of Missouri- Kansas City which analyzed the effects of the prevailing wage law in Missouri found that “prevailing wage laws do not raise the cost of construction”:
Utilizing data from the F.W. Dodge Company on construction costs in the North Central States region, we update our previous report for the period 2003-2010 on the impact of the prevailing wage statute in Missouri. Our update of 2011 has shown that Missouri's prevailing wage laws do not raise the cost of construction. [University of Missouri- Kansas City, December 2011]
Study On Reduction Of Prevailing Wage In Pennsylvania Found No Difference In Construction Costs Following The Reduction. A study by the Keystone Research Center found that after the Pennsylvania Department of Labor and Industry reduced the prevailing wage in 1997, the costs of construction of public schools did not reduce, “partly because wage declines lead to offsetting declines in productivity”:
Opponents of prevailing wage laws often argue that repealing or weakening these laws will lower the cost of public construction projects because such action will reduce the wages and benefits of construction workers employed on public projects. Data on Pennsylvania public school construction projects during the period in which lower prevailing rates were in effect do not support this claim.
- Data on public school construction costs show no strong evidence that Pennsylvania's lower prevailing wages and benefits reduced construction costs charged by contractors performing public works.
- Studies from other states show no statistically significant relationship between the existence of prevailing minimum wage and benefit laws and the cost of school construction.
- Lower prevailing minimum wages paid to workers have no measurable impact on public construction costs partly because wage declines lead to offsetting declines in productivity.
- Real savings in public construction costs are more likely to come from investments in worker training, which can make workers more productive, thereby lowering costs without cutting wages. [Keystone Research Center, 2/1/99]
Prevailing Wage Laws Have Significant Social Benefits For Workers And Families
Economic Policy Institute: Prevailing Wage Laws “Protect A State's Economy” And Discourage Cheating By Unscrupulous Contractors. According to an analysis of several prevailing wage studies by the Economic Policy Institute, prevailing wage laws “protect a state's economy,” and if repealed, would lead to losses in revenue and income. In addition, prevailing wage laws “discourage unscrupulous contractors who compete by hiring low-skilled labor, cheating on payroll taxes, or risking safety concerns at construction sites.” [Economic Policy Institute, 7/3/08]
Prevailing Wage Statutes Have Decreased Public Health Costs. A study determining the effects of repealing Missouri's prevailing wage law found that in states with prevailing wage laws, the reliance on the public sector for health insurance, retirement benefits, and other forms of public assistance decreased, the number of injuries and fatalities decreased, and productivity in the construction section increased. [University of Missouri- Kansas City, December 2011]
Prevailing Wage Laws Encourage Apprenticeship Training Which “Leads To A More Productive And Safer Workforce.” A study discussing the effect of prevailing wage laws on the construction industry in Iowa found that prevailing wage law, by encouraging collective bargaining which in turn encourages apprenticeship training, led to a 13 percent to 15 percent increase in value added from their work compared to states with no prevailing wage. The fatality rate from construction work-site accidents is also 25 percent lower in states with prevailing wage laws and “35% lower in states with the strongest and best-enforced prevailing wage laws.” [University of Utah, accessed 7/30/13]