2006 MN Prevailing Wage Survey

05/10/2007

An Evaluation of Prevailing Wage in Minnesota:
Implementation, Comparability and Outcomes
Lisa M. Jordan, Ph.D.
Lead Researcher
Associate Professor and Director,
Business and Organizational Leadership
Brevard College
Additional Contributors:
Robert Bruno, Ph.D.
Associate Professor
University of Illinois
Phil Schrader
Research Assistant
University of Minnesota
Tony Sindone, Ph.D.
Indiana University South Bend
A study funded by the Quality Construction Coalition
October, 2006 1
ABSTRACT
This study addresses the four questions posed by the Minnesota Office of the Legislative Auditor regarding the Minnesota Prevailing Wage Act.
1) The survey method that the Department of Labor and Industry currently uses to gather data for determining prevailing wage rates is both valid and reliable. The state makes reasonable efforts to survey all appropriate parties and to ensure that the data is trustworthy. Potential improvements could include clarification of occupational definitions, proactive review of data collected, and increasing response rates through incentives or simplifying processes.
2) Minnesotas modal method of determining prevailing wage rates is appropriate. A survey of state legislation shows that the majority of states with prevailing wage laws and the federal government apply some form of modal method. Given the segmented nature of the construction industry, the mode is the best measure of prevailing rate because it controls for the lack of homogeneous data. In other words, the mode provides the best measure of area standards considering the nature of the data available.
3) The enforcement of prevailing wage in Minnesota appears to be constrained as it is in many states by a lack of resources. A more effective approach could include more systematic auditing and creating a private right of action.
4) The preponderance of available studies shows that prevailing wage laws do not have a statistically significant impact on the total cost of public construction projects. In other words, prevailing wage does not appear to have any significant impact on the costs of public construction projects. Additionally, an analysis of Minnesota suggests that repealing or weakening the prevailing wage statute would cost the state between $37.8 and $178 million in tax revenues depending on which estimate of wage reduction one uses, and would result in weakening of apprenticeship training programs, an increase in injury rates, a weakening of the position of women and people of color in the construction industry, an increase in project cost overruns, and a reduction in construction employee wages.
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SUMMARY RESPONSE TO LEGISLATIVE AUDITOR
It is in the public interest that public buildings and other public works be constructed and maintained by the best means and highest quality of labor reasonably available and that persons working on public works be compensated according to the real value of the services they perform.1
Minnesotas prevailing wage statute provides that contractors must pay construction workers based on area standards when a project is funded by the state. In 1998, a Minnesota Department of Labor and Industry report concluded that:
The evidencefinds that not only is the prevailing wage legislation doing what it was intended to do, but absent such a provision, the effects are harmful to the industry and local economy.2
Our report concurs with this conclusion of the 1998 report, but is intended to provide support for the work of the Minnesota Office of the Legislative Auditor by addressing the specific questions posed.
Based on our review of the literature, as well as our own research, we find the following:
I. The Department of Labor and Industry uses reasonable methods to survey contractors about wages and benefits.
Section Five of the report discusses in detail the reliability and validity of the survey instrument used by the Department. Validity addresses whether or not the survey answers the question intended. Reliability is the degree to which the measurements are consistent and do not contain error. We find that the survey process established by the applicable regulations is structured in such a way as to maximize both of these factors. The state takes reasonable steps to survey all appropriate parties and to ensure that the data is trustworthy. As with all data collection, there may be non-sampling errors, or errors created by either a lack of responses or the reporting of false information. The state currently minimizes the latter both within the collection process and by authorizing a hearing on prevailing wage determinations.
We suggest some minor changes in the process including: clarification of occupational definitions and expectations, proactive review of data collected, and increasing response rates through incentives or simplifying response procedures.
1 Minn. Stat. 177.41.
2 MN Dept of Labor and Industry, Overview of Recent Studies on Prevailing Wage, 13 (1998).
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II. The Department of Labor and Industry uses appropriate methods to set prevailing wage rates.
The Department of Labor and Industry currently uses the mode as the method of determining the prevailing rate. In order to assess the reasonableness of this method, we considered two factors. First, we analyzed whether the mode is a method that is typically used by other states, and secondly, whether the mode is a good measure of prevailing rate.
Section Four of this report provides summaries of the data we collected on state determinations of prevailing rate. Based on this information, we found the mode to be consistent with the approaches used in a majority of other states.
Section Five offers a detailed analysis of the strengths and weaknesses of a variety of measures for determining prevailing rate, and provides a description of the different measures of central tendency. We find that given the segmented nature of the construction industry, the mode is the best measure of prevailing rate because it controls for the lack of homogeneous data. In other words, given the nature of the data available, the mode provides us with the best measure of area standards.
III. While every state is unique, the Departments methods are comparable to the way the majority of states determine and administer prevailing rates.
Through our review of state statutes and conversations with state officials, we found that currently the majority of states conduct their own surveys and use some sort of modal rate in order to determine the prevailing rate. Sixteen states have designated the modal rate as the prevailing wage by rule or law, nine states use collectively bargained rates to determine prevailing wage, and five states use federal Davis-Bacon rates either as the primary or secondary prevailing wage determination. Two states let the contracting agency determine the prevailing rate, and one state uses the median. Thus, Minnesotas method of determining prevailing wage is well within the norm.
IV. The enforcement of prevailing wage in Minnesota is constrained as it is in many states by a lack of resources and proactive auditing.
As in many areas related to the construction industry in general and prevailing wage in particular, there is scant literature that systematically reviews the enforcement of prevailing wage. Moreover, based on our review of the enforcement procedures used, we found that many states had no formal process. Of those that did have procedures few enforced them, and when prevailing wage is enforced it is usually at the request of unions or unionized contractors. Enforcement could be improved in Minnesota by more systematic auditing and creating a private right of action.
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V. While findings are mixed, most econometric analysis suggests that prevailing wage has no significant impact on total construction project costs.
Section Three provides a discussion of the available literature that considers the relationship between prevailing wage and total costs of construction. Some of the literature discussed is overly simplistic and fails to control for the range of variables that impact costs. Specifically, these studies fail to allow for factor substitution and assume that labor is homogeneous.
Other studies use regression analysis in an attempt to control for the factors other than prevailing wage that might impact total cost. The results of such studies are mixed. Based on our analysis of the available data, the preponderance of the data suggests that prevailing wage has little or no impact on total costs of construction. Data does suggest that when such a program is first introduced there may be a period of adjustment in order to maintain efficiency.
Section Three also offers a discussion of the variety of other impacts a change in prevailing wage might have on the state including:
A weakening of apprenticeship programs,
A weakening of the position of women and people of color in the construction industry,
An increase in injury rates,
An increase in project cost over-runs,
A reduction in construction employee wages, and
A reduction in state tax revenues.
VI. An analysis of Minnesota suggests that repealing or weakening the prevailing wage statute would reduce income in the state between $382 million and $1.8 billion annually; thus, costing the state between $37.8 and $178 million in tax revenues depending on which estimate of wage reduction one uses to assess the effects of law changes.
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SECTION ONE:
INTRODUCTION AND OVERVIEW
Prevailing wage laws have been passed at both the federal and state level3 and are intended to require construction contractors working on government-funded projects to pay their workers based on area standards. These laws were passed to maintain community standards, to promote economic stability and skill development, and to maintain quality on government projects. While prevailing wage laws share these common goals, the federal law, known as the Davis-Bacon Act4, and the state statutes, sometimes called Little Davis-Bacon laws, vary widely in the way they are implemented. Much of this variation has to do with state-specific economic issues and limitations on data collection. Other variation relates to political realities in the states.
Much of the prevailing wage debate focuses on the costs and benefits to states of prevailing wage laws. Critics of prevailing wage focus on the increased labor costs associated with the enforcement of prevailing wage. Advocates acknowledge that labor costs may be higher where there are prevailing wage regulations, but point out that project costs are not significantly different due to the higher efficiency of the workforce. Advocates also argue that prevailing wage laws encourage training, promote higher levels of safety on the job site, reduce cost over-runs and the costs of future maintenance, and generate a number of other positive outcomes.
In June of 2006, the Minnesota Office of the Legislative Auditor announced that it would examine in detail the methods used by the Department of Labor and Industry to
3 See Section Four, infra, for a list of states with prevailing wage laws.
4 29 U.S.C. 3141-3148.
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set prevailing wage rates and consider the advantages and disadvantages of alternative methods.5 Specifically, the issues the Auditors office is evaluating include:
1. Does the Department of Labor and Industry use reasonable methods to survey contractors about wages and benefits?
2. Does the Department of Labor and Industry use appropriate methods to set prevailing wage rates? How do the departments methods compare with those used by the federal government and other states?
3. How well do state agencies and other governmental units enforce prevailing wage laws?
4. What evidence do existing studies provide about the impact of prevailing wage laws on government costs and revenues and the broader economy?6
This report is intended to provide support for the work of the Legislative Auditor. This report includes:
A summary of the history and intent behind the development of prevailing wage laws both at the federal and state levels.
A review of the literature on the costs and benefits of prevailing wage laws to the state.
An analysis of how a change in the prevailing wage rate may impact the state of Minnesota.
A summary of the coverage of and methods used to determine prevailing wage in the 31 states that currently have Little Davis-Bacon Acts (along with an Appendix with each states regulations).
A detailed analysis of the procedures and method of determining Minnesotas prevailing wage.
A brief discussion of enforcement with an eye toward the standards used in other states.
Finally, a section that considers economic and other impacts of any potential changes in the prevailing rate.
5 Minnesota Office of the Legislative Auditor, Prevailing Wages: Evaluation Description, June 2006.
6 Ibid.
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SECTION TWO:
HISTORY OF PREVAILING WAGE LEGISLATION
Introduction
The history of prevailing wage is useful to understand the intent of the law. Minnesota passed its Prevailing Wage Act,7 or Little Davis-Bacon law, more than eighty-two years after the initial state prevailing wage law was enacted.8 The state was the last to embrace the prevailing wage concept. By the late 1970s forty-two states and the District of Columbia had adopted a prevailing wage law.
Minnesotas prevailing wage law represents the apex of Americas development of a regulatory system addressing worker wages, health and safety, and working hours. The history of prevailing wage is woven through the record of Americas efforts to establish wage and hour standards. As the Great Depression challenged the capacity of the American economy to provide prosperity for all citizens, Republican and Democratic Party leaders embraced the idea that rather than government using its massive economic clout to drive down contract prices and wages whenever it can9 it would get out of the business of cutting the wages of it citizens.10 It is this still largely held rationale that initially underscored the bi-partisan Congressional intent of the 1931 construction industry-oriented Davis-Bacon Act. While the 1931 law and its numerous state versions have been periodically attacked, the history of paying prevailing wages on eligible publicly financed construction projects remains a cornerstone of American economic policy.
7 Minn. Stat. 177.41-177.44.
8 A.J. Thieblot, Jr., The Davis Bacon-Act, (Philadelphia: University of Pennsylvania Press) 1975: 17.
9 Robert S. Goldfarb and John F. Morrall III, The Davis-Bacon Act: An Appraisal of Recent Studies, Industrial and Labor Relations Review 34.2 (January, 1981): 193.
10 Peter Philips, Kentuckys Prevailing Wage Law: Its History, Purpose and Effect, (1999) p. 22.
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State Prevailing Wage Laws: Kansas Goes First
In 1891 Kansas adopted the nations first state prevailing wage measure providing that not less than the current rate of per diem wages in the locality where the work is performed shall be paid to laborers, workmen, mechanics and other persons so employed by or on behalf of the state of Kansas.11
Once Kansas had acted an alliance of unions, Republicans, Democrats and the states Labor Party passed a wage law in New York (1894). By the third decade of the Twentieth Century, six additional states had laws governing hours of work and wages on state and municipal public construction (Oklahoma, 1909; Idaho, 1911; Arizona, 1912; New Jersey, 1913; Massachusetts, 1914; Nebraska, 1923). Although these state laws were drafted in somewhat vague terms, they set the stage for a federal prevailing wage law.12 As the battle over increased government regulation of working hours and pay for construction workers shifted back to the nations capital, proponents and opponents equally understood the implications: adoption of a national prevailing wage law would undoubtedly lead to a trend of similar laws in the states.
The Federal Davis-Bacon Act (1931)
Republican Congressman Robert L. Bacon made the first attempt to pass a federal law in 1927. He claimed that a federal building project in his home state of New York had been awarded to an Alabama contractor who, because of the low wages paid in Alabama, brought hundreds of its workers to the work site and still under-bid the higher-paying local firms. Bacon, a former banker, argued that the enormous potential
11 Hamid Azari-Rad, The Economics of Prevailing Wage Laws, (eds. Hamid Azari-Rad, Peter Philips and Mark J. Prus) (Ashgate: Burlington VT) 2005, pp. 12-13.
12 Peter Philips, et. al, Losing Ground: Lessons from the Repeal of Nine Little Davis Bacon Acts, Working Paper, 1995, pp. 2-3. 9
purchasing power of the federal government should not be used to fund projects that depress a local economy.13 He viewed his measure as a modest attempt to create a standard floor for wages and benefits on publicly financed construction work: The least the federal Government can do is comply with local standards of wages and labor prevailing in the locality where the building construction is to take place.14 Despite attaining a fair degree of bi-partisan support for the bill, hearings on the measure dragged on for four years. In 1930, Bacon obtained critical support from Republican Pennsylvania Senator James Davis who had previously served as a U.S. Secretary of Labor under three Republican administrations.15
The need for this legislation became apparent as the Depression deepened. President Herbert Hoover had already committed a half billion dollars to public works programs to stimulate local economies. In many communities, however, the Hoover plan was thwarted because local officials awarded the contracts to the lowest bidders who very often chose to import lower paid workers rather than employing local workers.16 The White House was engulfed with citizen complaints following several such incidents, and Hoover decided to find an efficient way to utilize federal contracts to lift the countrys staggering economy. At a news conference two days before Christmas, Hoover assured the reporters that it is the policy of the government both as to existing contracts and
13 Ibid., pp. 4-5.
14 United States House of Representatives, Hearing before the Committee on Labor on HR 17069, 69th Congress, 2nd Session, p. 2, February 18, 1927.
15 Peter Philips, Kansas and Prevailing Wage Legislation, prepared for the Kansas Senate Labor and Industries Committee, February 20, 1998, p. 9.
16 MN Dept of Labor and Industry, supra note 2, at i.
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those to be let that contractors shall keep up wages and pay not less than the prevailing wage in various districts.17
In 1931, Robert Bacons original version of the Act, now known as the Davis-Bacon Act, was passed and signed by President Hoover. The law required contractors on federally funded construction projects to pay the wage rate prevailing in the community in which the work was performed.18 In 1935, Congress gave the Secretary of Labor the power to determine the prevailing wage rate.19 Nonetheless, the definition of prevailing and the method by which it should be calculated have been the subject of debate ever since. The method of calculating the prevailing wage for a locality is not written into the Davis-Bacon law. Consequently, administrative changes have resulted in differing federal approaches to calculating prevailing wage.20
The Trend of Adopting Little Davis-Bacon Acts
Following the passage of the Davis-Bacon Act, state governments began to pass similar legislation applicable to state-funded construction projects. In less than ten years after the 1931 enactment of Davis-Bacon, seventeen states adopted their own Little Davis-Bacon laws.21 In the 1950s, both federal and state prevailing wage determinations increasingly reflected local and national trends of including health and welfare and pension benefits in the total compensation package for construction workers. In 1964, President Lyndon Johnson signed a new law, H.R. 6041, which provide[d] that wage determinations shall, in addition to cash wages, take account of prevailing benefits
17 Herbert Hoover, The Presidents News Conference, December 23, 1930 (quoted in John Woolley and Gerhard Peters, The American Presidency Project [online], Santa Barbara, CA: University of California (hosted), available at (http://www.presidency.ucsb.edu)).
18 46 Stat. 1494, Ch. 411 (Mar. 3, 1931).
19 49 Stat. 1011, Ch. 825 (Aug. 30, 1935) (amending 40 U.S.C. 3142).
20 Philips, supra note 12, at 5.
21 Philips, supra note 15, at 16.
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such as medical and hospital care, pensions and workmens compensation, unemployment insurance, vacations, holidays, and other such factors.22 By the late 1960s legislatures in states such as Kentucky were breaking down the prevailing wage as the sum of the basic hourly rate plus a supplemental hourly contribution to a plan for medical, pension, death or injury benefits.23 Kentuckys language and the amendments in other state prevailing laws closely paralleled the Davis-Bacon Act.
In February 1971, the trend of enacting prevailing wage legislation at the state level got a boost from an unlikely source. In the midst of increasing inflationary pressures caused by Vietnam War spending and a shortage in skilled trade labor in urban centers like Chicago and New York, President Richard Nixon temporarily suspended the Davis-Bacon Act.24 President Nixon argued that the operation of this law at a time when construction wages and prices are skyrocketing only gives federal endorsement and encouragement to severe inflationary pressures.25
President Nixons declaration also cast executive authority over the states separate public building wage rate provisions. The Presidents order call[ed] upon states and other governmental bodies with similar statutes to take similar action.26 President Nixons call fell on mostly unenthusiastic ears. Ohio Governor John Gilligan ridiculed the federal suspension as misdirected, ineffective, and carelessly drafted without any full
22 Lyndon B. Johnson, Remarks Upon Signing Bill Broadening the Prevailing Wage Section of the Davis-Bacon Act, July 2, 1964 (quoted in John Woolley and Gerhard Peters, The American Presidency Project [online], Santa Barbara, CA: University of California (hosted), available at (http://www.presidency.ucsb.edu)).
23 Kentucky State Legislature, Regular Session, 1968, New Laws Page 509, Senate Bill No. 123.
24 See Marc Linder, Wars of Attrition: Vietnam, the Business Roundtable, and the Decline of Construction Unions (Iowa City: Fanpihua Press, 1999).
25 Richard Nixon, Statement on Suspending Davis-Bacon Act Provisions for Federal Construction Projects, February 23, 1971 (John Woolley and Gerhard Peters, The American Presidency Project [online], Santa Barbara, CA: University of California (hosted), available at (http://www.presidency.ucsb.edu)).
26 Ibid.
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consideration of what is really meant. He also added emphatically that we are not going to suspend the provisions of that law in the state of Ohio.27 New Yorks labor commissioner Louis Levine joined Gilligan in insisting that state law would not be pre-empted by the federal suspension. After facing hostile state executives, and informed by legal counsel that the absence of a federal prevailing law did not invalidate the state statutes, President Nixon relented and reinstated Davis-Bacon 28 days after its suspension.28
In response to the presidents suspension of federal prevailing wage provisions, a number of jurisdictions that had relied on the national act decided they needed to pass their own laws.29 By 1979, 41 states, including Minnesota (1973), had adopted some form of a prevailing wage law. As the political tides turned in the 1980s, opponents increasingly raised the traditional arguments against prevailing wage laws: that they reduced worker productivity, raised the cost of public construction, violated the right of employers and workers to freely contract, and prevented minority contractors and workers from finding employment. The debates over the effects of prevailing wage were familiar, but they were now being argued in a different national political context.
In 1979, Florida became the first state to repeal its prevailing wage law. In 1981, Utah Senator Orin Hatch raised a challenge to the federal act by holding hearings on Davis-Bacons continuing relevance. While the federal law was not repealed, the Department of Labor did adjust Davis-Bacon regulations to reduce the applicability of collectively bargained rates in determining prevailing wage. From 1979 to 1995, eleven
27 Ibid.
28 William G. Whittaker, Congressional Research Service, The Davis-Bacon Act: Suspension, 109th Congress, 1st Sess., at 11 (1993).
29 Ibid., at 1-19.
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states repealed their prevailing wage laws (Florida, Alabama, Arizona, Colorado, Idaho, Utah, New Hampshire, Kansas, Louisiana, and Oklahoma).30 Eight other states have never adopted prevailing wage laws (Georgia, Iowa, Mississippi, North Carolina, North Dakota, South Carolina, South Dakota and Virginia).31
History of Minnesotas Prevailing Wage Law
On March 7, 1973, Minnesota State Representative Charles Samuelson introduced House File 134 at a subcommittee session of the Labor Management Relations Committee. His opening remarks succinctly explained the bills genealogy: House File 134 is patterned after the federal prevailing wage the so-called Davis-Bacon Act of the federal government.32
The need for a state prevailing wage law arose out of the contradiction apparent in enforcing the Davis-Bacon Act for federally funded construction work in Minnesota, but permitting the same contractors to work without a wage provision when only state or local funds were allocated. Representative Samuelson stated that the legislation would stop the practice of hiring out-of-state workers for a much lower rate by establishing a prevailing wage rate for all construction - highway and building construction in the state of Minnesota thats done by the state of Minnesota What this bill really attempts to do is to provide a fair bidding, if you would, to projects state projects within the state of Minnesota.33
30 Oklahomas law was invalidated by a court decision in 1995. See City of Oklahoma City v. The State of Oklahoma ex rel. Oklahoma Department of Labor, 918 P.2d 26 (Okla. 1995). See also Philips, supra note 15, Table 1 p. 12.
31 Philips, supra note 15, Table 1 at 12.
32 MN Dept of Labor and Industry, supra note 2, at iii.
33 Ibid.
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After passage of the Minnesota Prevailing Wage Act,34 administrative rules were promulgated in 1977 that defined the classes of labor (i.e., laborers, heavy equipment operators, truck drivers, and special crafts) covered under the measure. Procedures for determining the rates for classes were also established. The rules were first amended in 1980 to include, in part, definitions of key terms (i.e. highway/heavy, commercial, project similar, and residential construction) and to set time frames for determining wage rates [as well as] the applicable wage rates for apprentices.35 Four years later the rules were adjusted again. This time the method for collecting data (use of surveys) on wage rates was defined and collectively bargained agreements were recognized as a means of upgrading the rate pending the next survey if the prevailing rate last surveyed was a collectively bargained rate.36
Further adjustments to the laws administrative enforcement machinery continued in 1988 and 1994. In addition to the ongoing reassessment and refinement of the applicable regulations, an Advisory Committee was created in 1995 to assist in administering the Act. The Committee was composed of representatives of union and non-union contractors, as well as union and government representatives. Following two years of contested rule-making hearings, new procedures were approved modifying how the prevailing wage rate would be determined.37
The history of Minnesotas prevailing wage regulations is much like that of other states; it is unique to its historical circumstances. Although similar in intent to the federal Davis-Bacon Act, state laws including Minnesotas vary widely in means of
34 Minn. Stat. 177.41-177.44.
35 History of the Prevailing Wage Law, State of Minnesota, Department of Labor and Industry, Labor Standards Division, p. 8.
36 Ibid.
37 Ibid.
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implementation, including data collection, determination of prevailing wage, coverage, and enforcement. This is often a result of the political realities in which the legislation was passed and the negotiated nature of administrative rule-making.
This report attempts to offer both a broad summary of the impact of prevailing wage and a specific analysis of the Minnesota law, its implementation, and its impact.
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SECTION THREE:
THE DEBATE SURROUNDING PREVAILING WAGE:
IDEOLOGICAL POSITIONING AND EMPIRICAL REALITIES
As indicated in the history section, debates around prevailing wage laws have gone on as long as the laws have existed. Discussions tend to fall into four categories:
The broadest asks the fundamental question of whether or not it is appropriate for the government to become involved in regulating the construction market.
The second examines the costs and benefits to the state of that involvement.
The third considers the impact of the laws on the labor market for construction workers.
The fourth develops the labor market analysis and considers such questions as the impact of prevailing wage requirements on women and people of color, apprenticeship programs, and health care and pensions.
Not all these questions can be covered in the same depth in a report of this length, but we attempt to offer at least a summary of the literature available in each area and a more extensive analysis in those areas that appear to be of primary concern to the Legislative Auditor.
Generally, supporters of prevailing wage laws argue that they encourage the development of the economy along a high-skill path and that high skill levels lead to more productive and cost-effective production. As a result of this, workers can get paid higher wages while not significantly increasing the cost of public construction. Moreover, Little Davis-Bacon Acts increase the likelihood that public construction projects will be built by local contractors, thus keeping the money in the state. As a result, the money spent on public construction projects will have a higher multiplier and more significantly
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boost local economies and thus the tax base. Proponents also argue that by taking wages out of competition, you force contractors to compete on the basis of efficiency. Those contractors will in turn hire the most skilled workers available, thereby reducing the likelihood of cost over-runs and poor quality and increasing the level of safety and professionalism on the job.
On the other hand, opponents of prevailing wage legislation argue that such statutes unnecessarily increase costs and believe that unregulated markets are both more efficient and fair. Opponents of prevailing wage also argue that the way prevailing rate is determined is biased and unfair. They argue that the nature and extent of surveys is inappropriate and that fraud often exists in the process. Generally, underlying their arguments are two assumptions: first, that construction labor is basically homogeneous and, second, that taxpayers would be better off without prevailing wage regulations.
Industrial Structure, Governmental Bidding, and Efficient Outcomes
In this section of the report, we look first at the characteristics of construction that call for government involvement and then look more specifically at public construction. We contend that given the nature of the construction industry in general, and public contracts in particular, regulation of the market is necessary to insure the most efficient outcomes.
The role of government intervention is a philosophical question that predates prevailing wage and ultimately goes to the heart of a fundamental economic debate. Many who follow a laissez faire understanding of the teachings of Adam Smith believe that government should be involved in market transactions only in very rare situations. Other economists believe that because the market is imperfect, it is often not only
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appropriate but necessary for regulations to be established to support the smooth and efficient operation of the market.
This debate is clear in the discussion around prevailing wage regulations. On its website, the Associated Builders and Contractors (ABC), a trade organization comprised largely of non-union contractors, states,
In the 21st Century, especially in the new competitive global economy, it is essential to allow the free market system to determine wages. ABC strongly supports legislation and regulatory efforts designed to limit the negative affects [sic] of the Davis-Bacon Act. ABC will continue to be vigilant, working to prevent any expansion of the Davis-Bacon Act.38
The ABC argues that any involvement of the government will serve to artificially inflate wage rates and to increase costs to the governmental agency contracting the project, thus leading to inefficient outcomes in the market.
On the other hand, if one visits the website of the Building and Construction Trades Department of the AFL-CIO, a union organization, or one of its state affiliates, a very different picture of prevailing wage is painted.39 Prevailing wage not only increases living standards, but also leads to higher quality construction, more efficient outcomes and net benefits for the contracting organizations. Such views are shared by a variety of unionized contractor organizations such as the Sheet Metal and Air Conditioning Contractors National Association (SMACNA). For example, in a letter addressed to United States Senators concerning the reinstitution of prevailing wages in the Gulf Coast region after Hurricane Katrina, SMACNA states,
SMACNA and our thousands of contractor corporations greatly appreciate that S. 1749/H.R. 3763 recognizes the importance and merit in prevailing
38 Web site of the Associated Builders and Contractors, http://www.abc.org/wmspage.cfm?parm1=2140, accessed August, 2006.
39 See, e.g., Web site of the Minnesota Building and Construction Trades Council, http://www.minnesotabuildingtrades.org/prevailing.html, accessed September, 2006.
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wages as part of any quality based public procurement policy. Without prevailing wage statutes, the no bid or low bid contractor selection system will erode the wage and fringe benefit standards common in localities across the nation. Hiring firms that do not provide training, health care and wages that prevail in an area only shifts large costs to the already overburdened state and local governments.40
In order to more clearly understand the argument offered by those that support prevailing wage regulations as a way to correct market failures, one must consider the structure of the construction industry, the labor market for construction workers, and the way in which government contracts are bid.
The construction market is exceptionally diverse, ranging from small home remodeling projects to large highway and building construction projects.41 While the work of construction tends to be fairly labor intensive, large projects also require substantial capital investment. As a result, construction firms range in size, level of expertise, and level of attachment between employers and employees.42 Because of the segmented nature of the construction market the range of experience and skill within occupational categories varies widely.43
Moreover, one finds a variety of internal labor markets because of the segmented nature of the construction market and thus its labor market.44 There is often a weak attachment between employee and employer because construction workers often move between employers.45 Thus, while much of construction work is highly skilled, single
40 Web site of Sheet Metal and Air Conditioning Contractors National Association, http://www.smacna.org/pdf/legislative/sample_letter.doc, accessed August 27, 2006.
41 Gerald Finkel, The American Construction Industry, in The Economics of Prevailing Wage Laws, eds. Hamid Azari-Rad, Peter Philips, and Mark J. Prus (Ashgate: Burlington VT) 2005, p. 37.
42 Ibid. at 39.
43 See generally Paul Osterman, An Empirical Study of Labor Market Segmentation, 28 Industrial and Labor Relations Rev. 508-23 (1975).
44 Finkel, supra note 41, at 37.
45 See generally Richard B. Freeman, The Effect of Unionism on Worker Attachment to Firms, NBER Working Paper No. W0400 (July 1980).
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employers may have little incentive to invest in the training of a worker who is likely to move on to other employers after a short time. In other words, although construction firms need highly skilled workers, no single employer has an incentive to invest in the long-term training of a particular employee because employees often move from employer to employer. This is what we mean by a market failure.
As a result, multi-employer and joint (union-management) apprenticeship programs, typically certified by either the federal Bureau of Apprenticeship Training (BAT) or a State Apprenticeship Commission (SAC) have emerged. In Minnesota, the Division of Labor Standards and Apprenticeship of the Department of Labor and Industry oversees apprenticeship.46 This oversight insures the quality of apprenticeship programs and is an example of government involvement in the construction labor market that has been deemed necessary by the state in order to insure a consistent supply of skilled labor and thereby correct a market failure.47 Moreover, as discussed later in this section, the best performing apprenticeship programs exist where prevailing wage laws are the strongest.
Similarly, the government has acted to enhance quality in construction by adopting a lowest responsible bidder requirement. Both Minnesota and the federal government have guidelines for bidding on projects because public contracts must be awarded to the lowest responsible bidder.48 The state seeks to protect the quality of construction even as it awards the contract to the low bidder by clarifying its specific expectations on public projects; prevailing wage is one such specification. Supporters
46 Minn. Stat. 178.03.
47 Ibid., Subd. 3.
48 Minn. Stat. 16C.28 (mandating that contracts be awarded to the lowest responsible bidder, taking into consideration conformity with the specifications, terms of delivery, the purpose for which the contract is intended, the status and capability of the vendor, and other considerations imposed in the call for bids).
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contend that bid specifications such as prevailing wage are necessary in order to assure that the government receives a good quality product for its investment.49 Thus, paying prevailing wage is considered to be one example of what it means to be a responsible bidder that assures quality work on a public project.
Charles Groshens, Labor Investigator Supervisor for the Minnesota Department of Transportation, in discussing this issue said,
At home, I never choose the lowest contract bid. Im concerned about not only price but quality. At the State, we dont have that choice so we are careful to specify precisely what we want. The bid request specifies the kind of mud we want on the walls and if they dont use it, we make them pay.
He went on to say that he believes prevailing rate to be the best way to specify the quality of labor on the job. We could get cheaper labor, but we would have to be rebuilding the project in a couple of years.50
Does Prevailing Wage Increase Quality and Productivity?
Mr. Groshens sentiments reflect the stated policy of Minnesotas prevailing wage statute that, it is in the public interest that public buildings and other public works be constructed and maintained by the best means and highest quality of labor reasonably available.51 Mr. Groshens anecdotal discussion of prevailing wage also mirrors traditional economic analysis concerning marginal productivity and efficiency wages.
Efficiency wage theory focuses on the effect of wages on incentives and worker productivity and suggests that higher than market clearing wages enhance worker
49 See, e.g., Jolie M. Siegel, Comment: Project Labor Agreements and Competitive Bidding Statutes, 3 U. Pa. J. Lab. & Emp. L. 295, 310 (2001) (discussing New Yorks procurement law and noting that its purposes include facilitat[ing] the acquisition or construction of high quality goods at the lowest possible cost.).
50 Charles Groshens, telephone interview with Lisa Jordan, August 15, 2006.
51 Minn. Stat. 177.41.
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productivity and increase profits.52 Conversely, if employers pay lower wages they are likely to get those who do a lower quality of work and have lower productivity. Thus, establishing a wage rate that is prevailing in the market enables the government to attract workers of at least prevailing productivity and training to public projects. Moreover, paying a wage premium may reduce labor turnover costs, attract a higher quality work force, reduce shirking and absenteeism by raising the cost to workers of being fired, and increase worker effort from improved morale.53
Empirical evidence supports this idea. For example, in a 1984 study Allen found that unionized labor in the construction industry is between 44 and 52 percent more productive than non-union labor when other variables such as firm size, geographical differences, education, and age were controlled for.54 While he found that the productivity differential may be declining over time, he also found that unionized workforces clearly have economies of scale on large projects such as office buildings leading to at least 30% greater productivity, though those advantages are not as large on schools and hospitals (only 0-20%).55 In an analysis of value added per employee in construction, Walter found that construction productivity was 25% higher in states with
52 For further explanation of efficiency wages and analysis, see George Akerlof, Gift Exchange and Efficiency-Wage Theory: Four Views, 74 American Economic Review 79-83 (1984); Alan Krueger and Lawrence Summers, Efficiency Wages and the Inter-Industry Wage Structure, 56 Econometrica 259-294 (1988); Kevin Murphy and Robert Topel, Efficiency Wages Reconsidered: Theory and Evidence, in Y. Weiss and G. Fishelson. Eds. Advances in the Theory and Measurement of Unemployment, New York: St. Martins Press, 1990, pp. 204-240.
53 See Akerlof, supra note 52, at 79.
54 Steven G. Allen, Unionized Construction Workers Are More Productive, Quarterly Journal of Economics 99.2 (May, 1984): 251. This study, which assumed that wages for unionized workers were higher than those of their non-union counterparts, provided the clearest analysis of the influence of wages on worker productivity. See also Mark B. Stewart, Union Wage Differentials, Product Market Influences and the Division of Rents, Economic Journal, 100.403 (Dec., 1990): 1122-1137.
55 Steven G. Allen, Can Union Labor Ever Cost Less? Quarterly Journal of Economics 102.2 (1987): 347-73.
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prevailing wage than in states without it.56 Finally, Freeman and Medoff found a productivity advantage for unionized labor when labor-management relationships are good.57
It is possible that these productivity differences may be due to substitutions of capital for labor as labor costs rise. However, it is also likely that where prevailing wage laws exist, employers recruit more highly skilled employees to work on those projects in order to assure that each workers marginal productivity is high enough to meet the increased marginal cost.
Some recent work by Duncan, Philips, and Prus supports this hypothesis. In their study of school construction efficiency in British Columbia they used a stochastic frontier regression to assess the efficiency of the use of inputs in producing outputs. They found that for the first 17 months after the fair wage law went into effect, construction project outcomes where indeed less efficient. However, after 17 months, any efficiency problems were resolved. They concluded,
This finding suggests that the wage policy did not alter input utilization of covered projects. Non-union contractors may have shifted crew mixes toward the use of more productive workers. Or fair wages may have been used as efficiency wages to encourage the productivity needed to offset higher wage ratesregardless of the specific adjustments, we do not find any statistically significant evidence that this legislation was associated with the kind of productivity changes that would decrease output or increase costs.58
Moreover, the research of Philips, et al., shows that prevailing wage improves the quality of construction. He found that after Utah repealed its prevailing wage law, the
56 Mike Walter, The Economic Impact of Prevailing Wage Requirements in Minnesota, Industrial Relations Center of the University of Minnesota, January 1992, p. 10.
57 For a more detailed discussion, see Richard B. Freeman and James L. Medoff, What Do Unions Do? New York: Basic Books Inc., 1984, pp. 162-180.
58 Kevin Duncan, Peter Philips and Mark Prus, Prevailing wage legislation and public school construction efficiency: a stochastic frontier approach, 24 Construction Management and Economics 631 (2006).
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amount of cost over-runs on state road construction tripled in the following decade.59 Belman and Voos note that a variety of researchers have found that low-wage workers in construction are typically less skilled and thus may not generate savings on projects.60
Of course, not all analysts agree that paying higher wages promotes higher quality and productivity. For example, Ohio utilized user surveys to assess quality changes after suspending prevailing wage for school construction. Ohio reported that users saw no difference in the quality of construction. However, the Ohio study notes that user analysis of quality may not be a good measure.61 The Kentucky Legislative Research Commission also found no conclusive evidence that higher wages ensure higher quality and productivity.62
While higher wages alone may or may not ensure a more productive and skilled workforce, the state provides an incentive for the contractor to hire the most skilled workers available by setting wage standards. Given the bidding process in public construction, it is clearly in the interest of the state and taxpayers to specify the quality of labor by requiring prevailing wage.
Prevailing Wage and Project Cost
Most discussions of prevailing wage laws, whether in Minnesota or across the nation, begin with the question of how the law affects construction costs and thus state budgets. Not surprisingly there are arguments on both sides and outcomes vary
59 Philips et al., supra note 12, at 31.
60 Dale Belman and Paula Voos, Prevailing Wage Laws in Construction: The Costs of Repeal to Wisconsin, the Institute for Wisconsins Future, October, 1995, p. 12. We know of no empirical research that specifically assesses the relationship between overall quality and prevailing wage.
61 Ohio Legislative Service Commission, The Effects of the Exemption of School Construction Projects from Ohios Prevailing Wage Law, Staff Research Report No. 149, May 20, 2002, p. 27.
62 Ginny Wilson, Mike Clark, Greg Hager, Cindy Upton, Betty Davis, Barry Boardman and Tom Hewlett, An Analysis of Kentuckys Prevailing Wage Laws and Procedures, Research Report No. 304, Legislative Research Commission, December 2001, p. 52.
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depending on how empirical studies are specified (what data and variables are used). The majority of the academic literature finds that while prevailing wage regulations do increase wages (or the lack of prevailing wage drives wages down), total project costs are not significantly increased when prevailing wage regulations are in place.
Opponents of prevailing wage, including legislators, employers, and scholars, have argued that although prevailing wage laws were designed to stabilize local economies, the laws artificially inflate incomes and place an unnecessary burden upon contractors and state budgets. Simply put, opponents claim that repealing the law or changing the way prevailing wage is calculated will result in a significant savings for the state.
The crux of this argument is that wage rates in states with prevailing wage requirements are inflated above wage rates in states without prevailing wage laws. Similarly, wages will be higher in states with stronger prevailing wage laws than in states with weaker laws.63 Thus, a change from a strong law to a weak law or to no prevailing wage requirement will result in a drop in wages, thereby reducing the considerable cost of labor associated with large construction projects. This reduction in labor costs means cheaper state-funded construction projects and a cost savings when compared to projects requiring prevailing wages. Within this line of reasoning, if Minnesota changed the method of calculating prevailing wages from the current modal method to the mean or weighted average method, construction projects would supposedly cost less and state budgets would benefit.
63 A.J. Thieblot, State Prevailing Wage Laws: An Assessment at the Start of 1995, Associated Builders and Contractors, Inc., Rosslyn, VA., 1995.
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On the other hand, proponents of prevailing wage laws argue that such an analysis is simplistic and ignores a range of other factors that ultimately impact total project costs, state budgets, and the broader economy.64 In their analysis, they consider factors such as the quality of construction (including the incidence of cost overruns and delays), the impact on state revenues, the impact on the availability of training, and the cost of workers compensation claims.
A growing body of literature attempts to compare total project costs between prevailing wage and non-prevailing wage projects. Any such comparison is difficult because there is a wide range of variables to consider. Results of these studies vary widely. While some estimate that prevailing wage has no significant impact on total costs; others estimate that prevailing wage increases cost by up to 35%. The challenge is to assess which studies most accurately account for the range of variables that may impact cost and, thus, isolate the impact of prevailing wage.
Studies of the impact of prevailing wage on total costs are generally conducted in one of three ways:
The most basic analysis estimates the impact of eliminating prevailing wage laws (or changing the way that prevailing rate is calculated) on labor costs. In these studies, lower wages are simply substituted for higher wages holding all other variables constant.
Other studies attempt to compare public construction project costs/bids during a suspension of prevailing wage with costs when the regulations are in force.
64 A non-exhaustive list of these studies includes: Belman and Voos, supra note 60; Minnesota Taxpayers Association, Prevailing Wage Rates in Minnesota, February 2005; Jeff Vincent, Prevailing Wage Reform: Fact vs. Fiction: A Response to Arguments Against Indianas Prevailing Wage Law, March 1987; Michael Kelsay, L. Randall Wray and Kelly Pinkham, The Adverse Economic Impact from Repeal of the Prevailing Wage Law in Missouri, January 2004; Peter Philips, Kentuckys Prevailing Wage Law: Its History, Purpose and Effect, October 1999; Walter, supra note 56; Michael Reich, Prevailing Wage Laws and the California Economy, February, 1996; Peter Philips, Delawares Prevailing Wage Law: Its History, Purpose and Effect, May, 1998.
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The final approach uses regression analysis to try to control for the impact of a variety of variables while isolating the impact of prevailing wage on total construction costs.
While we will not summarize all the studies in detail here, we will provide specific examples of each type of analysis and references to other similar studies.
Studies That Assume Lower Wages While Holding All Other Variables Constant
In the first approach, a lower estimate of labor costs is created assuming that prevailing wage regulations are weakened or repealed. For example, the researcher may determine what s/he believes would be the wage absent the law. These estimates are then used to calculate project costs holding all other variables constant. The results of this very basic type of analysis are generally consistent. Given that these studies assume all other factors remain constantincluding quality of labor, capital/labor ratio, and quality of constructionthey find that the elimination or weakening of prevailing wage will tend to reduce labor costs per worker hour and thus the total cost of construction. According to a review by Duncan and Prus, these kinds of studies typically find that Davis-Bacon increases project costs by 1.5 to 3 percent, though some studies found no increase in total costs.65
Two such studies have been conducted in Minnesota. The first was completed by Mike Walter at the University of Minnesota. At the time of his study, the Minnesota Chapter of the ABC had argued that repealing prevailing wage would save the state between 10% and 30%. Walter set out to test this hypothesis. First, he compared average non-union contractor wages with prevailing rate and found them to be 31.7% to 46.3%
65 For a list of studies using this methodology see: Duncan, Kevin and Mark J. Prus, Prevailing Wage Laws and Construction Costs: Evidence form British Columbias Skills Development and Fair Wage Policy, in The Economics of Prevailing Wage Laws, eds. Hamid Azari-Rad, Peter Philips and Mark J. Prus (Ashgate: Burlington VT) 2005: 126. 28
less. He assumed that on-site labor costs were 27.3% of total costs, basing this assumption on the 1987 Census of Construction. He also assumed no change in productivity as wages declined. Given those assumptions, he found a potential maximum savings of 10.2%.66 Walter then conducted what he called a more accurate assessment of the market rate of wages in construction.67 Using data derived from the Minnesota Department of Jobs and Training in the last half of 1990 and the first half of 1991, he found that average hourly wages and benefits for construction workers in Minnesota was $19.56. He found the weighted average for 17 construction classifications was between $16.18 and $25.11. He concluded, The potential savings of repealing the prevailing wage statute then translate to roughly 6.6% of labor costsor 1.8% of total costs.68
The second study was conducted by the Minnesota Taxpayers Association in 2005. This study sought to analyze whether any potential savings would be generated by changing the method of calculating prevailing wage from the modal method to the federal Davis-Bacon method69 or the median method utilized by the Minnesota Department of Employment and Economic Development (DEED). The Association collected 2004 data from the Departments of Education and Transportation along with data from the 2002 legislative bonding bill. Based on this data, they found that total project costs subject to the states prevailing wage law totaled $1,707,269,000.70 They then calculated
66 Walter, supra note 56, at 7.
67 Ibid, p. 8.
68 Ibid, p. 9.
69 The federal Davis-Bacon method is outlined in 29 C.F.R. 1.2(a)(1), which provides that the prevailing wage is the rate paid to a majority of workers in a classification (the mode), or, if no rate is paid to over 50% of the workers, the weighted average of wages paid to employees in the classification.
70 It is unclear from the report whether this is in 2002 or 2004 dollars. For the sake of this analysis, I will assume 2002 dollars. If this is not correct, I will have simply over-estimated the savings.
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the cost of these projects using the Davis-Bacon rates71 and the median DEED survey rate. They assumed that up to 45% of total construction costs were labor costs subject to prevailing wage.72
The authors seemed surprised to find that if the Davis-Bacon rates are used, total project costs would actually increase somewhere between $3,091,000 and $8,427,000.73 In discussing the potential substitution of Davis-Bacon rates, they concluded that not only would switching likely cost the state additional money in terms of survey costs, but that, while the state would save 1.2% to 1.5% on transportation projects by making the switch, Minnesota would assume 1.3% to 2.0% higher costs for building projects.74
Not surprisingly, the Taxpayers Association study found that a switch to the DEED median would save the state a significant amount of money. As discussed more fully below, the DEED rate surveys are flawed because they include data on apprentices and helpers, and include data on anyone that can be called, for example, a carpenter. Thus, while the current method of prevailing wage calculation excludes apprentices and helpers, and is likely to capture only journeymen carpenters in the construction industry, the DEED rate includes both those skilled and unskilled, experienced and not, and those working in traditional construction jobs, and those who may not be.75 In their analysis, they did adjust DEED rates to include fringe benefits (22%).
71 This methodology for calculating savings does not allow for input substitution and declining productivity as less skilled workers take the jobs. Based on other empirical analysis, such a methodology significantly overstates any potential savings.
72 Minnesota Taxpayers Association, Prevailing Wage Rates in Minnesota, February, 2005 www.mnabc.com/pdfs/prevwage.pdf, accessed August 20, 2006, p.6.
73 Ibid., p.11.
74 Ibid.
75 Such problems in the DEED rate make the methodology used in this analysis even weaker because at the lower median rate, based on previous research, skill levels on the job site are likely to fall significantly. Thus, estimated cost savings are likely significantly overstated.
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Based on the assumptions they made, the Taxpayers Association found that projects could have been constructed for from 7.4% to 10% less or the state could have saved between $126,495,000 and $171,120,000. 76 However, given that they grossly overestimated labor costs as a percentage of total construction costs, their estimates should likely be cut in half. In order to achieve the 10% savings they suggest, labor costs would have to drop by 50% and the quality and quantity of labor used would have to remain constant.
Both the Walter and Taxpayers studies failed to account for the wide range of variables that impact total cost and assumed labor to be homogeneous, which is clearly not the case in an industry as segmented as construction.
Studies Evaluating the Impact of Changes in the Law
In the second set of studies the authors take advantage of changes in the law to estimate the impact of prevailing wage on total construction costs.
In 1975, Thieblot used a one-month suspension of the federal prevailing wage law to study the potential cost savings of elimination of Davis-Bacon. Thieblot compared bids on projects that were bid both before and during the suspension and found that Davis-Bacon increased costs by less than one percent.77 In 1980, two researchers from the conservative American Enterprise Institute reworked Thieblots study attempting to adjust for inflation and information changes. They found that, given the data provided by the suspension of prevailing rate, we might expect a repeal of Davis-Bacon to save four to seven percent in total project costs.78
76 See Minnesota Taxpayers Association, supra note 64, at 15.
77 Thieblot, supra note 8.
78 For a discussion of that analysis, see Ohio Legislative Service Commission, supra note 61, at 13.
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Studies Using Regression Analysis
In the third set of studies, researchers use regression analysis to control for the range of variables that impact total costs by allowing them to isolate the impact of any given variable. Of course, the variables used in the analysis will impact the outcomes. If the regression equation is not specified appropriately, then a single variable may serve as a proxy for others that have been excluded.
Fraundorf, et. al were the first to use regression analysis to try to determine the impact of prevailing wage on total project costs. Their study examined 215 new non-residential construction projects in rural areas built in 1977 and 1978 and attempted to control for the type of project, region and types of building materials. They found that on federally funded construction projects, total costs were 26.1% percent higher than private construction projects. They concluded that their results, clearly show that Davis Bacon increased costs .substantially.79
The results of the study and their conclusions are questionable because the total cost differential found was greater than the differential between prevailing wage and non-prevailing wage. Prus and others have commented that the study failed to control for factors other than prevailing wage that might explain why public sector projects are generally more expensive than those in the private sector. Given the way the estimation was specified, it is possible that the prevailing wage variable is serving as a proxy for a range of other variables that might explain the differences between public and private construction.
79 Martha Fraundorf, John Farrell, and Robert Mason, The Effect of the Davis-Bacon Act on Construction Costs in Rural Areas, The Review of Economics and Statistics 66.1 (Feb. 1984): 143.
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In his 1996 study, Prus first sought to reproduce the Fraundorf study using data collected from the F.W. Dodge Corporation. Using a methodology very similar to the earlier study, he found that, public projects in states having prevailing wage laws are 27.6% more expensive than private structures.80 However, as Prus points out, the methodology Fraundorf and Prus used is incapable of distinguishing between increases in costs due to prevailing wage and increases due to other differences between public and private construction.
Prus also reviewed cost differentials on public and private projects in states where no prevailing wage law exists. He found that publicly financed projects were 31% more expensive than private projects. This finding raised the question: why are publicly financed projects more expensive even when no prevailing wage law exists?
Prus offered some ideas but did not test any of them empirically. He did, however, run a final regression to try to assess the impact of prevailing wage on public construction costs. In this model he included an interaction variable to control for prevailing wage. The coefficient on the variable was positive but not statistically significant. In other words, prevailing wage does not appear to have any significant impact on the costs of public construction projects. One must look for other explanations as to why public projects in all states (those with prevailing wage and those without) tend to be 25.9% higher than comparable private projects.
Prus noted that, This result lends support to the notion that the public may be more exacting than the private sector. It also suggests that it is inappropriate to assume that the higher costs of public projects are attributable t