“Prevailing Wage” Policies – Don’t Throw Out the Baby With the Bath Water

Wonder if they paid prevailing wage for this?

“Prevailing wage” policies (in essence) require government construction contractors to pay wages closer to what union shops pay, which is of course generally higher than pay at non union companies, sometimes much higher. Along with the minimum wage, prevailing wage policy is one of the few remaining tools government can still (realistically) use to prevent the further erosion of worker wages.

“Prevailing wage” is under attack ideologically by politicians opposed to wage regulations of any kind, even where the government is contracting for the labor.  Opponents also say that paying “prevailing wages”  inflates government capital budgets, either limiting how many schools, bridges, roads and other projects can be built, or making taxpayers pay “more than necessary” for capital projects.

In most of the battles around the country over prevailing wage policies, there are only two choices – retain it or scrap it.  Policy-making in general today is binary. But, prevailing wage requirements are eminently scalable. Without implacable ideologies, and where compromise is still possible, adjustments can be made so that capital budgets are not being busted, while skilled construction labor can still receive a “living wage,” materially above minimum.

Something like that appears to have happened recently in Delaware. The Delaware story wasn’t buried in Delaware, but it was in the rest of the country. You can read about it here. In contrast with battles in places, where prevailing wage rules have been repealed, the Republican controlled legislature in Delaware passed a law which affects the way prevailing wage is determined, but the core policy appears to remain intact.

The public is a lot more aware of minimum wage, but the higher wages paid to government contracted construction workers under prevailing wage rules, can have much greater impact on local economies. Yes, the impacts can be negative or positive, but I argue that, just like the minimum wage, when the upward adjustments are reasonable,  paying the higher prevailing wage is beneficial to the overall economy of a region. More about that later.

The change adopted in Delaware is not easy for headline writers. It involves which data are used to determine the prevailing wage in a community. That may elicit a yawn, unless you’re a numbers junkie…..or really care enough about workers wages to venture into the weeds a bit.

The bill passed in Delaware says data provided by the federal Bureau of Labor Statistics (BLS) shall be used in administering the State’s prevailing wage law, rather than data from other sources. State Labor and Industry agencies across the nation often provide the information used for prevailing wage determinations.

Without maligning data from all Labor and Industry agencies, or that used from other sources, it is true that sloppy or politically compromised wage surveys, from time to time, result in outrageously skewed wage data (usually in the high direction). That of course affects the prevailing wage mandated by governments, and has contributed to opposition. However, ideologues, who don’t want any government involvement in wage setting, would oppose prevailing wage even if the data were not sometimes skewed.

In my own experience, managing a large state research shop which provided labor market data, the BLS data were generally the most trusted.  Under contract with BLS, we obtained the data through large scale, professionally conducted surveys. Our surveyors worked hard to construct representative samples (neither under or over sampling union shops) and to encourage accurate responses from both union and non union employers. The survey process was insulated from politics.

I am discouraged by arguments against prevailing wage which cite examples of outrageously high wages mandated by some governments for certain projects. These problems are solvable. I am especially skeptical and discouraged by arguments, appealing to taxpayers, that prevailing wage requirements bust capital budgets, limit the number of projects that can be accomplished, and cause higher taxes.

When politicians say their government can save, say, $20 million on their $100 million capital budget, it doesn’t mean the jurisdiction’s annual budget is reduced by $20 million, or that citizens will see that reduction in tax bills, or that another $20 million in additional projects can be funded, if only prevailing wage would get out of the way. On the latter point, it could mean some projects don’t get done as quickly, but not that they fall off the radar screen altogether.

Governments typically issue 20 to 30 year bonds to fund capital projects. On a current account basis, the government is paying debt obligations annually on those bonds, not $100 million at once. For a hypothetical $100 million capital outlay supported by 20 to 30 year bonds, the government is probably spending anywhere from $5 million to $10 million in annual debt payments. So, even if eliminating prevailing wage reduced the cost of capital projects by 20 percent — which is a high estimate in most cases – a local government is saving perhaps $1 to $2 million in their operating budget.

That is nothing to sneeze at, but is it too high a price to pay for retaining one of the last policy instruments available (in practical terms) to address income gap and inequality issues?  Moreover, my back of the envelope estimate of budget/tax burden – the $1 to $2 million figure — is on the high side, because it doesn’t include tax collections from increased spending in the community by higher paid workers.

Yes, the owners of construction companies may have to absorb some of the costs of paying a higher wage (though they are likely passing it along to the customer – in this case the government, where it’s further passed on in tiny amounts to numerous tax payers).  But, even if the owners are making less profit, evidence is strong that lower income people, like a typical worker, spend any extra income more quickly, and more of it in their own communities, than higher income folks.

Of course all bets are off if a minimum or prevailing wage intervention by government is large and precipitous. Yes, you can sink an economy if wage policies are extreme.  But, ideologues don’t seem to care if the re-distribution is small or large; they are against it anyway. And those same folks invoke slippery slopes and tipping points. I understand and respect that; but it’s a matter of when your risk aversion comes into play. It’s a simple truth, that conservatives and liberals are risk aversive about different things, around who’s ox is at risk of being gored.