Prevailing Wage Opponents Fail the Laugh Test

Part One of a Three-part Series on Prevailing Wage

Prevailing wage laws have long operated nationally and in states as a check against the tendency of the construction industry to degenerate into destructive wage and price competition. Such competition can drive skilled and experienced workers from the industry, reduce productivity and quality, and lead to poverty-level jobs, all without saving construction customers any money.

In an exhaustive review of the research on the impact of prevailing wages on contracting costs, Nooshin Mahalia concluded:

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.

Although the weight of evidence suggests prevailing wage laws do not raise costs, advocates for repealing the law in Pennsylvania continue to repeat some version of the following:

Prevailing Wage law also harms taxpayers, as it forces them to pay higher labor costs on public construction projects. Construction companies forced to pay union-inflated wages and benefits will pay upward of 30 percent more in labor costs for identical work on private sector projects. This adds a little more than 20 percent to the cost of every taxpayer-funded construction project — resulting in an estimated $1 billion cost for state and local taxpayers each year.

- Matthew J. Brouillette
President & CEO of the Commonwealth Foundation
March 22, 2011 

What is the source of this 20% saving claim? One source is Nathan Benefield, the research director of the Commonwealth Foundation, in this 2009 blog post.  

Benefield compared wages as measured in Occupational Employment Statistics (OES) to the Pennsylvania Department of Labor and Industry’s prevailing wage and concluded that prevailing wage rates are on average 37% higher (in a future post, I will address this issue directly). To estimate how this difference will affect total cost, Benefield assumed that labor represents 45% of total cost.

There are several problems with this analysis. 

Today I will address the first: it fails the laugh test. According to the 2007 Economic Census of Construction, labor costs represent no more than 24% of total construction costs in Pennsylvania. In road and bridge construction, much of which is funded by the state and thus impacted by prevailing wage regulations, labor costs represent no more than 21% of total cost.

If labor were 45% of total costs, and cutting wages and benefits were to have no impact on worker productivity, it would be possible to achieve a 20% reduction in total costs with a 37% reduction in labor costs. 

But only in Commonwealth Foundation World do labor costs account for 45% of construction costs. Tables 1A and 1B below show that if you use actual data on labor’s share of total cost, the wage declines necessary to achieve a 20% reduction in total construction cost are impossibly — laughably — large.  

In all construction, for example, labor costs are 24% of total costs. With labor costs at 24% of project costs, wages must fall by 70% to wring 20% out of total production cost, from $36.30 to $10.89 per hour for a carpenter in Philadelphia — that's below even what Benefield claims Philadelphia carpenters make when not on a prevailing wage projects (see Table 1A).

With labor costs equal to 21% of project costs, as on road and bridge construction, wages would have to fall 80% to lower total costs by 20% (see Table 1B). Cement masons in Dauphin County employed on a road project would see their wages fall from $34.76 per hour to $6.95 per hour (the minimum hourly wage is currently $7.25).

Table 1. Changes in total cost as a function of the share of labor cost
A: Benefield's calculation assuming labor represents 24% of total construction cost in PA
  With P.W. Without P.W. % Change
Labor Cost $240,000 $72,000 -70.00%
Non-Labor Cost $760,000 $760,000  
Total Cost $1,000,000 $832,000 -20.19%
B: Benefield's calculation assuming labor represents 21% of total cost in road & bridge construction
  With P.W. Without P.W. % Change
Labor Cost $210,000 $42,000 -80.00%
Non-Labor Cost $790,000 $790,000  
Total Cost $1,000,000 $832,000 -20.19%
Note. The calculation of percent change is sensitive to the point of reference. The percent change in labor cost is calculated relative to the labor cost with a prevailing wage. The percent change in total cost is calculated in reference to total cost without a prevailing wage. To switch the point of reference is unconventional but necessary to remain consistent with the manner in which Benefield made his calculations. Calculating the percent change in total cost in the cases above where total cost with a prevailing wage is the point of reference results in a 17% decline in total costs.

Recall that Benefield's laughable savings projections are the basis for the claim that the state can save $1 billion per year. Don’t count on it. 

On Monday: Prevailing Wage Oponents Fail Labor Market Stats 101

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