Op-Ed Gets Facts Wrong on Prevailing Wage

Yesterday, an op-ed appeared in the Charleston Daily Mail penned by Bryan Hoylman, the president and CEO of the Associated Builders and Contractors of West Virginia. Mr. Hoylman’s op-ed was strongly anti-prevailing wage, going so far as comparing the state’s prevailing wage to “larceny.” But, while the op-ed was strong on rhetoric, it was weak on the facts, making several claims that were distorted or flat out false about the state’s prevailing wage.

First, the op-ed stated the West Virginia’s prevailing wage has increased 24% since 2008, outpacing wage growth in every other industry in state. This simply is not the case, and a simple check of the statistics proves it to be false. First, the state doesn’t have one prevailing wage rate, it has 2,640, for 48 different occupations in 55 counties, and they have all changed at different rates, some more than others. But for simplicity’s sake, we can average the 48 occupations together in one county. So, for Kanawha County, the average prevailing wage rate has increased from $24.81 in 2008 to $29.49 in 2015, an increase of 19%. Why is it not 24%, like in Hoylman’s op-ed? Because the op-ed is including fringe benefits. For Kanawha County, including fringe increases the growth rate to 26%, since, as everyone is familiar with, health care costs are growing faster than the overall economy.

Including fringe benefits when comparing the prevailing wage growth to just wage growth in other industries is another misleading apples to oranges comparison, since fringe benefits are only included for prevailing wage and not in industry wage statistics. When comparing the prevailing wage basic wage rates growth (not including fringe benefits), to average wage growth from the BLS Current Employment Statistics (also not including fringe benefits), it’s clear that the growth in WV’s prevailing wage rates is right along with most other private industries.

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Next, the op-ed goes after fringe benefits themselves, arguing that they, too, are inflated compared to the rest of the economy. The op-ed states that under prevailing wage, construction workers are mandated, “to be paid anywhere from 50 to 80 percent of their pay package for benefits,” while the Census Bureau shows that under normal circumstances, “employee benefit packages equal roughly 25 percent of their pay.”

Either through a misunderstanding or ill intent, the op-ed is twisting the definition of pay to make prevailing wage look inflated. According to the Census, in March 2015, employer costs for employee compensation averaged $33.49 per hour, which included $22.88 in wages and salaries, and $10.61 for benefits. So, of total compensation, wages were 68% and benefits were 32%.

Let’s look back at Kanawha County’s prevailing wage. Under prevailing wage in 2015, total compensation averaged $47.86, which included $29.49 in salaries and $18.37 in benefits. So, for prevailing wage, of total compensation, wages were 62%, and benefits were 38%, pretty close to the average from the Census, but nowhere near 50-80%.

So where does the 50-80% claim come from? It appears for prevailing wage, the op-ed is calculating benefits as percent of wages, which is in that range for most occupations, rather than calculating benefits as a percent of total compensation, as the Census does. Comparing benefits as a percent of wages to benefits as a percent of total compensation isn’t a comparison at all, they are two entirely different figures. The statements in the op-ed are completely wrong. 

The op-ed also gives an example of a flag-waver earning $42/hour (including benefits, if the op-ed didn’t make that clear), when in the “market” unskilled labor earns around $10/hour, as an example of the prevailing wage gone wild. First off, flag wavers are generally found on road construction projects, which, since they are largely federally funded, are subject to the federal prevailing wage law. West Virginia’s law has no relevance there. But the author may be surprised to learn that in the “market,” according to BLS statistics, only 10% of “construction laborers” earn $10/hour or less. 

Regarding the recently passed law, and the controversy over its implementation, the op-ed states that the law specifically cites how to calculate the new wage, when in fact, the law simply states that Workforce WV shall determine a new methodology “as evidenced by all appropriate economic data, including, but not limited to, the average rate of wages published by the U. S. Bureau of Labor Statistics,” with no specifics at all.

Finally, the op-ed states that the temporary repeal of the prevailing wage, “may ultimately save taxpayers millions of dollars in just a few months.” This flies in the face of all the available evidence. Not only is there no evidence that West Virginia’s prevailing wage law has added to the state’s construction costs, there’s no evidence that repeals of prevailing wage laws save any money, as Kentucky, Ohio, Michigan, and Kansas have all learned.

Contrary to the rhetoric, the facts make it clear that West Virginia’s prevailing wage law is a good deal for the state, and helps create a more productive and efficient construction industry. The savings and benefits promised to states that repeal or weaken their prevailing wage laws have always failed to materialize. Doing so in West Virginia would hurt local workers, send tax dollars out of state, and provide the public with a poorer return on its investment.

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Correction: The op-ed author is Hoylman, not Holyman.

Apples to Oranges: Comparing Prevailing Wage Rates

Earlier, I showed how it’s nearly impossible for the prevailing wage to add 25% to the cost of public construction projects, like opponents to the law claim, even if you assume that the prevailing wage is nearly 50% higher than average wages in the construction sector. But let’s take a closer look at that 50% claim.

Opponents to West Virginia’s prevailing wage law claim that the way the prevailing wage is calculated is flawed, and biased towards higher wages. This claim is supported by a study from the conservative Public Policy Foundation of West Virginia, which found that West Virginia’s calculation for the law results in prevailing wages that are 49% higher than the average market wage. However, the Public Policy Foundation’s method of comparing wages was itself flawed.

The study compared the prevailing wage rates set by the West Virginia Division of Labor with the average wages for construction occupations from the Bureau of Labor Statistics Occupational Employment Statistics (OES). And prevailing wages are an average of 49% higher than the averages for construction occupations from the OES.

But while using the OES data allows for comparisons of occupations, the OES is measuring a different portion of the construction industry than what receives the prevailing wage. The OES data includes workers in the residential construction sector, which typically employs workers with lower skill levels and less experience than those who work on large projects typically funded by the state. Prisons, schools, and bridges are larger, more complex projects than what is found in the residential construction sector, and require more skilled and experienced workers. As a result, the workers are higher paid.

In fact, when you compare wages for residential and nonresidential construction workers, which you can do using data from the Quarterly Census of Employment Wages (QCEW), nonresidential workers do make far more. The gap between the average wages from the OES and the prevailing wage rates set by the Division of Labor reflects the gap between residential and nonresidential construction.

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And it’s not just West Virginia’s prevailing wage law that is creating the wage gap between residential and nonresidential construction. Virginia, with no prevailing wage law, has a similar wage gap. And while Virginia’s gap is less pronounced than West Virginia’s, that is due to its residential wages being higher than West Virginia’s, rather than West Virginia’s nonresidential wages being excessively inflated by the prevailing wage.

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Using OES data to compare prevailing wage rates overstates the cost of prevailing wage. While the point of the prevailing wage law is to ensure that wages paid to workers on state construction projects don’t result in a race to the bottom, they probably wouldn’t fall by 50% without the prevailing wage. And even if they did, the state wouldn’t save 25% on the cost of public projects like prevailing wage opponents claim. 

Does that mean that the wages from the QCEW should be used to set prevailing wage rates? Not really. The wages in the QCEW are the average of all workers at a particular establishment, which can include multiple occupations and jobs. So while the QCEW shows that workers at a roofing establishment earn an average weekly wage of $928 in West Virginia, those workers aren’t all necessarily roofers. That wage figure includes managers, receptionists, and other non-roofing occupations that can exist in a roofing establishment.

In addition, the average weekly wage in the QCEW is calculated by dividing the annual wage by 52 (weeks). The construction industry is very seasonal, with most workers working less than 52 weeks in a year (according to the Current Population Survey, construction workers in West Virginia work an average of 47 weeks per year). This makes their average weekly wages lower in the QCEW, since it includes several weeks of not working. So a construction worker earning $25/hour, but only working 47 weeks/year would show up in the QCEW as earning $904/week or the equivalent of $22.60/hour. And since the prevailing wage is set hourly, you really can’t compare the two.

And if the OES data isn’t an appropriate comparison, and the QCEW isn’t an appropriate comparison, what can you do? You can take a survey, which is exactly how West Virginia’s prevailing wage rates are set.

If West Virginia’s prevailing wage rates really were that far out of line with the market averages, then our construction costs should be higher than in other states, particularly those without a prevailing wage law. But, that is not the case. This study, prepared for a county government in Maryland, looked at the median cost of school construction per square foot for six mid-Atlantic states, both with and without prevailing wage laws. And it found that West Virginia had the 2nd lowest construction costs of the six states. Our per square foot construction costs were only 0.7% higher than North Carolina’s, the state with the lowest costs. Our construction costs were 20% lower than in neighboring Maryland, which has only partial prevailing wage coverage, and 7% lower than neighboring Virginia, which has been cited as a model  by opponents of West Virginia’s law.

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While the prevailing wage does result in higher wages, those higher wages result in more experienced workers with greater productivity. And that productivity offsets the higher wage. That’s why, as the study found, while the prevailing wage created a wage premium for construction workers, “there is no measurable or statistically significant increase in construction costs associated with prevailing wage regulations.” The report also found that it did appear that prevailing wage laws encouraged the use of local contractors. 

So, once again, opponents of West Virginia’s prevailing wage law have overstated their case, and their math doesn’t add up. In reality, the impact of West Virginia’s prevailing wage law is consistent with its original intent: to promote a path of high-wage economic development by keeping our tax dollars in West Virginia.

Savings From Reforming Prevailing Wage Laws Might Be A Tad Overstated

As Ted pointed out after the election, changes to West Virginia’s prevailing wage law are likely going to be one of the priorities of the legislature’s new Republican majority. New Senate President Bill Cole was a lead sponsor of a bill to repeal the state’s prevailing wage law, and the West Virginia Chamber of Commerce is pushing for changes as well. 

Prevailing wage laws require that public construction projects done by private contractors pay a standard pay rate to their workers. The pay rate is based on a survey of all employers in given geographic area for each trade. Prevailing wage laws keep government-funded construction projects from devolving into a race to the bottom, with contractors bringing in low-wage, low-skilled workers from outside the state to do public works projects, and leaving when they are finished. Prevailing wage laws ensure that experienced and skilled workers aren’t driven from the industry, and that the tax dollars that fund local projects stay in the community.

Opponents to prevailing wage laws claim that the laws inflate the cost of public construction projects, costing taxpayers. According to the West Virginia Chamber of Commerce, West Virginia’s prevailing wage laws, “costs the public a minimum of 25 percent more on public works paid for with public funds.” However, the Chamber’s math doesn’t add up.

According to the Chamber, West Virginia’s prevailing wage rates are too high, and the too-high wages increase the cost of public construction projects by at least 25%. But according to the 2007 Economic Census, labor costs account for only 27.7% of construction costs in WV.

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If labor only accounts for 27.7% of total costs, then it is virtually impossible to reduce total costs by 25% by reducing the state’s prevailing wage rates, like the Chamber claims.

Let’s assume that the state has a $1 million construction project. If the prevailing wage adds 25% to the state’s total construction costs, like the Chamber claims, then the state should be spending $800,000, with the prevailing wage adding $200,000 in excess costs. But with labor costs at 27.7% of construction costs, that means the state is paying about $277,000 for labor under the prevailing wage law. Therefore, the state would have to reduce labor costs from $277,000, to just $77,000 in order to eliminate the 25% increase in total costs that the Chamber claims the prevailing wage adds, a decrease in labor costs of 72%. The extra 25% that the Chamber claims that the prevailing wage adds to public construction costs accounts for nearly three-fourths of the state’s construction labor costs.

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To make the Chamber’s numbers work, an cement mason working on a public project in Kanawha County would have to have their wages fall from $28.70/hour to just $7.98/hour, which is below the state’s minimum wage. 

Now let’s take things one step further, and give opponents of the prevailing wage the benefit of the doubt. According to the conservative Public Policy Foundation of West Virginia, West Virginia’s prevailing wage rates are 49.5% higher on average than the average construction wage rates (I’ll have another blog post coming up on why that’s not an accurate figure either), and that 22.5% of constructions projects are subject to the prevailing wage . If that’s the case, then labor’s share of total construction costs would be 41.2% for prevailing wage projects, higher than the industry average. But even with that higher labor cost, the Chamber’s claims still don’t add up.

On a $1 million project prevailing wage project, with labor cost at 41.2% of total costs, the state would be spending $412,000 on labor. If the prevailing wage adds 25% to the cost of the project, then labor costs would have to go down to just $212,000, almost in half, to eliminate the extra 25%. That would mean that the prevailing wage is nearly 100% higher than the market average, not 49%, like the PPF report claims to have found.

Even taking some rather questionable claims about prevailing wage rates at face value, the Chamber’s claim that the prevailing wage adds 25% to public construction costs just doesn’t add up.

In fact, a review of the academic research on prevailing wages found that when the researchers examine the data, and not hypothetical scenarios, they find that prevailing wage regulations do not increase government contracting costs. Instead, prevailing wage laws, “provide social benefits from higher wages and better workplace safety, increase government revenues, and elevate worker skills in the construction industry.”