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.
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.
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."