What do we know about the impact of current wage laws? – Mackinac Center

In 1891, Kansas became the first state to adopt a wage mandate in effect, which typically requires governments to pay a predetermined wage for the work it subcontracts, rather than using a negotiated or based rate of pay. on the market. Dozens of other states followed suit, with regulation particularly popular in the 1930s. But not all states joined the crowd.

Eight never adopted the rule in the first place, and another 15 have since repealed theirs. The spread and repeal of existing wage mandates have created many opportunities to study how regulation affects economic performance, and there is no shortage of research today. But the prevailing wage research literature reports mixed signals at best about the effects of the government-imposed wage hike. In a previous blog, I also reviewed some published material on current wages and a somewhat incomplete interpretation of these.

Naturally, many studies focus on how existing wage mandates affect wages. Many of them conclude that the law works as intended: it increases the wages of construction workers on government projects. For example, a 2000 study used data from 1982 to 1992 and found that current wage laws not only “improve both wages and benefits” but also force employers to pay higher pension contributions. Likewise, a 2005 study found that workers on construction projects covered by current wage rules earned more than workers on similar projects not subject to these rules.

A series of related studies examines what happens in the absence of an effective salary mandate. While they typically see wages decline after current salary mandates end, they offer no consensus on the amount. Contrast a 2018 study, which reports that the current wage repeal has resulted in an annual decrease in wages of 2 to 4%, to a 2016 study which reports a total decrease of only 4% in the 10 years following the repeal.

A larger body of research explores the link between existing wage mandates and construction costs. While some studies find that the rule increases the cost of affordable housing and residential accommodation, and thus reduces the number of units available, school construction costs receive much more attention. Based on data from a private analysis company collected during the 1990s, two studies, one published in 2002 and another published a year later, concluded that current wage laws do not increase school construction costs. A 2020 study on the costs of building schools in Ohio reiterated this conclusion, although its authors relied on only four years of data, just as a 2014 study of British Columbia.

But other studies come to a very different conclusion. A 2010 analysis Construction bids for nearly 3,000 schools indicated that an existing salary mandate and other regulations significantly increased construction costs. Another study, based on interviews with entrepreneurs, found that the rule increases costs by about 26% percent. Estimates for New York sets the increase at 13-25%, and a separate report in Nevada found even more significantly inflated costs.

There is good reason to believe that current wage rules make new construction more expensive: they increase labor costs without creating compensatory efficiency gains. A 2001 study explicitly tested this thesis and, using data from a small sample of school construction projects in Pennsylvania, showed that current wage rules increased workers’ wages and benefits, which directly translated into more construction. high. Another study from 2005 also finds that the rule increases compensation costs, which also increases construction costs. The author also notes that “the wage laws in force appear to be an ineffective mechanism for obtaining additional quality”.

Given the relationship between current wage rules and construction costs, many studies have examined whether governments would save money on infrastructure if they repealed the regulation. A 1996 study estimated that repealing existing federal and state wage mandates could reduce construction costs by more than $ 4 billion per year. Soon after, a 2000 Evaluation of the Congressional Budget Office said that “the federal government could reduce construction spending by repealing the Davis-Bacon Act,” which prescribes the prevailing construction wages paid by the federal government. Subsequent CBO estimates estimate the potential annual savings to be nearly $ 2 billion.

Yet like so many other aspects of the prevailing wage literature, there is no consensus on whether repeal reduces construction costs. For example, a 2020 study found that the reduction in Nevada’s wage rule reduced bid competition, which ultimately led to higher costs. But this result goes against the grain; other studies find no dominant wage effect on bid competition. In addition, inconsistency in conclusions regarding construction costs may exist because many studies fail to differentiate bids for different types of work. This is a crucial distinction, because evidence from Ohio suggests that current wage rules affect the cost of some categories of labor (eg plumbing) but not others (eg masonry).

High wages don’t just affect construction costs; they also determine employment levels. This aspect of the prevailing wage economy has also come under scrutiny. The CBO assessment mentioned above noted that repealing the Davis-Bacon Act would increase employment opportunities in construction, especially for those who have difficulty finding employment under existing labor rules. . More precisely, a study of 162 metropolitan areas projected that the repeal of the Davis-Bacon Act would generate more than 30,000 construction jobs. Likewise, a study focused on New Jersey found that the absence of an effective salary mandate creates more jobs, although the broader economic benefits of the additional employment are uncertain. Both results echo a 1999 analysis by the Mackinac Center, which reported fewer construction jobs per capita in prevailing wage states, compared to states without a mandate.

An often overlooked aspect of current wage rules is their potential to produce discriminatory results for workers. Several studies, including one by 2001, indicated that the end of the current wage mandates had led to a slight decrease in construction wages. But interestingly, this 2001 study found that the decline was “mostly borne by unions and white workers.” In other words, the repeal of the mandate narrowed the pay gap between black and non-black employees. A study by an academic at the University of Baltimore, among others, highlights that stricter wage rules in force correspond to a decline in construction employment among blacks and that repealing these rules would benefit minorities. The question, however, is the subject of some controversy (see a review of this study as well as that of the author reply).

Another researcher, however, calls the current wage laws disaster for minority communities. He writes: “Persistent discrimination lawsuits, combined with anecdotal reports of discrimination, suggest that significant discrimination continues to exist in construction unions. Since current wage laws tend to exclude non-unionized work in favor of unionized work, this is done to the detriment of minority workers who face union discrimination.

Although the stock exchange points out the problems with existing wage laws, there are still ambiguities and future studies could resolve these ambiguities by addressing four points. First, researchers need to recognize that not all construction projects are the same. Countless studies combine all project offerings into a single category and apply statistical models to the data, a research design choice that lacks common sense. Elementary schools are not the same as secondary schools, which are different from university buildings, which are nothing like highways and bridges. Single-story and multi-story structures impose very different costs, and the requirements of public and private projects often differ. Future studies should incorporate these distinctions. They should also look at the final costs of the project, not just the bids. This is an essential consideration due to frequent increase in costs for certain types of infrastructure.

Second, the statistical approaches to routine salary evaluations need to be significantly improved. Researchers should avoid the common practice of analyzing a few years of data and should instead rely on at least a decade of data, preferably collected over one or more business cycles. They should also stop simply comparing the average bids before and after the current wage repeals, a strategy that ignores the critical economic factors that affect these numbers. These factors include supply chain disruptions, perhaps due to natural disaster or geopolitical conflicts, and normal fluctuations in the cost of raw materials.

Third, researchers should assess how the overall regulatory environment affects wages and costs. The current wage rules are far from the only regulations imposed on the construction of schools and other infrastructure projects. Research suggests that regulations have an additive effect on construction costs, and studies that fail to control regulatory differences between state and local governments do so to their detriment.

Fourth and finally, those who study the current wage mandates should assess whether the regulations are good for the company. Much of the existing research focuses on what the ruler does and on a vital but narrow segment of the population: construction workers. If, as some studies suggest, parts of this group are better off because of the current wage rules, then who or what is worse off, and by how much?

Researchers who address these four points will advance knowledge in economics and prove useful to policy makers and members of the public.


Permission to reprint this blog post in whole or in part is hereby granted, provided the author (or authors) and the Mackinac Center for Public Policy are properly cited.


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