The effects of prevailing wage laws: A comparison of individual workers’ wages earned on and off...

The Effects of Prevailing Wage Laws: A Comparison of Individual Workers' Wages Earned on and off Prevailing Wage Construction Projects

MIKE CLARK*

Kentucky Legislative Research Commission, Frankfort, KY 40601

I evaluate the effects ofprevailing wage laws using a unique data set that shows the wages paid to workers on prevailing wage projects and the wages paid to the same workers during the same time period for work on projects not covered by prevailing wage regulations. The wage comparison shows that workers are generally paid more for work on prevailing wage projects than they are for work on non-prevailing wage projects. Thus, prevailing wage laws likely do increase the cost of public construction. In addition, to the extent that the quality of construction is improved, prevailing wage laws appear to be an inefficient mecha- nism by which to achieve additional quality, as the regulations often result in workers being paid more than they earn in the private market.

I. Introduction

The effects of prevailing wage laws on public construction costs have been studied for a number of years. State and federal prevailing wage laws require construction contractors to pay employees a minimum of the prevailing wage rate and specified benefits for work on certain public construction projects. The minimum wage and benefits are intended to reflect the wages and benefits prevalent in the area. The academic literature generally concludes that prevailing wage laws increase public construction costs. In spite of this, there continues to be considerable debate and controversy about the effects of prevailing wage laws. Proponents argue that construction projects built under prevailing wages are no more costly than similar projects built without prevailing wages. In addition, it is argued that prevailing wages provide additional benefits, such as higher quality construction and reduced injuries among construction workers. Even among those who find that prevailing wages increase the public construction costs, estimates of the effect have varied greatly.

The continuing debate appears to be largely due to the difficulty in measuring the effects of prevailing wages, and several approaches have been applied, including

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comparisons of prevailing wage rates to other measures of local wages and comparisons of construction costs for projects covered by prevailing wage regulations with projects not covered by the regulations. All attempts to measure the effects have been hampered by the difficulty of controlling for other factors that may contribute to wage or cost differences.

This study adds to the discussion of prevailing wage laws by using a new data set from Kentucky that shows the wages paid to workers on prevailing wage projects and the wages paid to the same workers during the same time period for work on projects not covered by prevailing wage regulations. If construction workers are paid more on prevailing wage projects than non-prevailing wage projects, the regulations likely increase the cost of public construction. The advantage of these data is that, by holding constant both the workers and the time period, the possibility that other factors not related to the prevailing wage law may be explaining observed differences is reduced. Although the data do not allow for an evaluation of whether prevailing wage laws increase the quality of construction, they do provide an indication as to whether any marginal increase in quality is achieved efficiently. If workers are paid more on prevailing wage projects than they are on private projects, prevailing wage laws result in wage payments above what the private market pays for the same level of quality,

II. Overview of Kentucky's Prevailing Wage Laws

The first prevailing wage law was passed in Kansas in 1891, and Congress adopted the federal version, commonly known as the Davis-Bacon Act, in 1931. The federal prevailing wage law requires contractors to pay employees at least the prevailing wage for work done on federally funded or federally assisted construction projects costing more than $2,000.

Kentucky first passed a state prevailing wage law in 1940. Currently, both Ken- tucky state and local government construction projects estimated to cost $250,000 or more are subject to the law. Contractors or sub-contractors working on a prevailing wage project must pay their workers at least the prevailing wage for the area in which the project is located, which is set through one of two methods. First, in some areas of Kentucky, federal Davis-Bacon wages are adopted. Federal prevailing wages are set by the U.S. Department of Labor. The Department of Labor surveys contractors, unions, local officials, and other interested parties to collect wage data. If a majority of the workers (the Kentucky Labor Cabinet defines majority as 51 percent or more) within an occupation earn the same wage, that wage becomes the prevailing wage. Otherwise, the prevailing wage is set using the mean of the wages for the occupation in the survey data. In areas of Kentucky where federal prevailing wages are not adopted, the Kentucky Labor Cabinet holds hearings to collect wage data. In 1996, the Kentucky Labor Cabinet collected wage data and made prevailing wage determinations for all counties in the state, and the Cabinet 's prevailing wages were compared to federal Davis-Bacon wages. In areas where the two sets of wages were similar, the Cabinet simply adopted Federal Davis-Bacon wages for future determinations.

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As with the federal prevailing wages, if a majority of the observed workers within an occupation earn the same wage, that wage becomes the prevailing wage. Otherwise, the prevailing wage is set using the mean of the wages.

Currently, 31 states have prevailing wage laws that cover public construction projects (Nelson, 2002). Starting with Florida in 1979, several states repealed their prevailing wage laws (Tbieblot, 1995), and by 1988 nine states bad repealed their state- level laws. In 1994, Michigan's law was declared "invalid and unenforceable" in court. This was reversed on an appeal in 1997 (Nelson, 1998).

Prevailing wage laws continue to be a controversial topic debated by state policymakers. Numerous bills have been introduced in state legislatures to strengthen, and to weaken, state prevailing wage laws. Both Montana, in 1997, and Connecticut, in 1999, expanded their prevailing wage laws to cover non-construction workers (Nelson, 1998, 2000). Ohio exempted public school construction for five years starting in 1997 to study the effects of prevailing wage on school construction costs (Nelson, 1998). Maryland, however, enacted legislation in 2000 to extend its prevailing wage law to cover a larger portion of public school construction (Nelson, 2001).

Opponents of prevailing wages have long argued that mandating minimum wages increases public construction costs. This increase could occur because the implementation of a wage floor prevents contractors from using the most cost-efficient mix of labor and capital. Even though the prevailing wage rate is intended to be representative of the wages paid, wages paid to some workers could be lower than the prevailing wage regardless of how the prevailing wage is set. Some argue that prevailing wages reflect union wages and, therefore, do not represent the wages paid to typical workers. A review of the wage data collected by the Kentucky Labor Cabinet showed that union workers accounted for 81 percent of the wage data used for setting prevailing wages since 1996. Union construction workers account for approximately 21 percent of nonresidential construction workers in Kentucky. Of the prevailing wage determinations made since 1996, 61 percent were based solely on union wage data. As union wages are typically higher than nonunion wages, this further increases the wage floor and construction costs.

Proponents argue that the laws do not increase construction costs because the laws encourage contractors to hire more productive workers and better equip those workers. The greater productivity arguably offsets the additional wage costs. In addition, proponents assert that prevailing wage laws yield more skilled construction workers, and therefore, a higher quality product with lower long-term maintenance costs.

III. Earlier Evidence

Most, but not all, of the economic literature concludes that prevailing wage laws do indeed increase public construction costs. Even the literature concluding that the law increases cost contains considerable disagreement on the magnitude of the increase. Much of the disagreement stems from the difficulty in controlling for other factors that may affect costs. Thieblot (1975) used a suspension in the federal Davis-Bacon Act


to evaluate its effect on federal projects. In 1971, the Davis-Bacon law was suspended for three months. Any projects that were bid prior to the suspension, but not yet awarded, were rebid. This provided a sample of bids with and without prevailing wages. Thieblot (1975) compared the bids to determine if the bids with prevailing wages were higher. The study concluded that the Davis-Bacon Act increased public construction costs by approximately 1.5 percent. Gould and Bittlingmayer (1980), however, argued that Thieblot (1975) underestimated the effect by failing to account for the high rate of inflation during this period and information that contractors were able to obtain from the first round of bidding. After adjusting for these factors, they concluded that prevailing wages increased construction costs by 4 percent to 7 percent.

The General Accounting Office (1979) estimated the effects of the federal prevailing wage law on public construction by comparing the Davis-Bacon wages to other less biased estimates of the wages being paid in an area. The wage differences were then multiplied by an estimate of the annual man-hours in public construction. The study concluded that the law increased public construction costs by 3.4 percent. Allen (1983), however, argued that this underestimated the effect because contractors will likely substitute toward more capital or higher skilled workers when faced with a minimum wage. Thieblot (1996) compared the earnings of construction workers to the earnings of all workers in states that repealed their prevailing wage laws, states that did not repeal their laws, and states that never had prevailing wage laws. He concluded that repealing state prevailing wage laws decreased public construction costs by around 3 percent. Kessler and Katz (2001) found that wages of construction workers decreased in states that repealed prevailing wage laws. They also found that the decrease was largely borne by union construction workers. Their findings suggest that prevailing wages result in higher construction costs for public projects.

Other studies have applied regression analysis in an attempt to estimate the effects of prevailing wages. Fraundorf et al. (1983) estimated the effect of prevailing wages by comparing the costs of public projects built under prevailing wages to the costs of private projects not subject to prevailing wages using regression analysis to control for various differences in the costs of various projects. Their study concluded that prevailing wages increased public construction costs by 26 percent. Bilginsoy and Philips (2000) criticized this approach, arguing that the analysis failed to control for differences between private and public construction and that this biased the estimate of the prevailing wage effect upward.

Bilginsoy and Philips (2000) estimated that the school construction costs in British Columbia increased by 9.4 percent after the implementation of a prevailing wage law, but indicated the difference was not statistically significant. They also noted that construction costs were increasing prior to the implementation of the law, but were declining after. They concluded that the change in the time trend indicated that the effects of the prevailing wage law gradually declined over time. They estimated that construction costs returned to their pre-prevailing wage level after about 20 months. It is not clear, however, that the prevailing wage effect would erode as they suggested. The authors could not determine whether the negative time trend after implementa-

MIKE CLARK 729

tion of the law was due to an aspect of implementation of the prevailing wage, such as contractors learning and adjusting to the new regulations, or some other factor. If other factors are the cause, there is no reason to believe the prevailing wage effect actually declined over time. If contractors adjusted to the new regulations, the time trend would not likely have been linear, as estimated in their model. Therefore, the decrease over time might have slowed, with the initial prevailing wage effect only being partially eroded.

Azari-Rad et al. (2003, 2002) considered the effects of prevailing wage laws on the cost of new public and private school construction. After controlling for the size and type of school, the start season, and market forces, both studies concluded that prevailing wage laws did not have a statistically significant effect on new school construction costs. Although this approach appears reasonable, the specification is some- what limited. The only characteristics specific to the schools were size in square feet and type of school (elementary, middle, or high school). Other unpublished studies have found that other factors, such as the number of stories, have significant effects on school construction costs (Prus, 1999; Philips, 1999, 2001). In addition, prevailing wages only entered the regression equation as a single dummy variable, which does not allow the effect to vary for different types of schools. Prevailing wage laws may have different effects on construction costs depending on school charac te r i s t i c s - - some school officials in Kentucky indicated that prevailing wages are not a constraint for large or complex projects. The reasoning was that only large contractors typically would bid for these projects, and large contractors were more likely to be unionized. A review of the wage data submitted for prevailing wage determinations in Kentucky showed that 61 percent of the prevailing wage rates were based only on union wages. As prevailing wages in Kentucky often are equal to union wages, the prevailing wage does not affect projects that would be awarded to union contractors, Given that the results of Azari-Rad et al. (2003, 2002) contradict the expectations of a price floor and have potential specification issues, additional work is needed to determine if their results hold under different specifications.

Goldfarb and Morrall ( 1981 : 194) stated that the "ideal way of evaluating the effect of Davis-Bacon, of course, would be to rerun recent construction history in the absence of Davis-Bacon." As this will not occur, researchers must rely on less direct methods to evaluate the effects. This study provides a new approach to evaluating the effect of prevailing wage laws on construction costs: by comparing the wages of construction workers on prevailing wage projects to the wages these same workers earn on non-prevailing wage projects.

IV. Methodology

Several contractors who were interviewed indicated that it was common practice to pay workers a higher wage rate on prevailing wage projects than on non-prevailing wage projects. These workers may temporarily earn higher wages, but they are then returned to their normal wage when they return to non-prevailing wage projects. In a survey of construction contractors that had performed work on prevailing wage projects in 2000


in Kentucky, approximately 16 percent of nonunion contractors indicated that the prevailing wage rates and benefits were the same as the wages these contractors paid on non-prevailing wage work (Wilson et al., 2001). Approximately 76 percent of union contractors indicated that the wages they paid on prevailing wage projects and non- prevailing wage projects were the same. The practice of paying different wages on these projects provides a method by which the effects of prevailing wage on construction costs may be evaluated. By comparing the wages paid on prevailing wage projects to the wages the same workers earn on non-prevailing wage projects, it is possible to determine if prevailing wage laws increase public construction costs. If the same workers are paid more than they otherwise would be paid, it suggests that prevailing wage laws do increase construction costs. That is, the project could have been built by the same contractor at a lower cost, with no change in the mix of workers and capital if the workers who were employed on the job were simply paid their normal wage.

Comparing the wage rates only provides a valid test of the effect of prevailing wages, however, if contractors do not accept lower profits when faced with prevailing wages. That is, profits on prevailing wage projects must be greater or equal to profits on non-prevailing wage projects for the comparison of the wages to signal higher cost as a result of the prevailing wage. Prevailing wage laws increase the costs of contractors who use low-cost labor, making them less competitive. Therefore, there should be less competition with prevailing wage laws than without the laws. The greater competition without prevailing wage laws should prevent profits from rising above normal levels. As there is potentially less competition in the presence of prevailing wage laws, there may be greater opportunity for contractors to earn above normal profits. Therefore, it appears reasonable to assume that profits from prevailing wage projects are no lower than profits on non-prevailing wage projects.

The advantage of comparing the wages for individual workers is that there is no need to control for state or time differences as was necessary in studies that compared prevailing wage projects to non-prevailing wage projects. In these studies, costs differences attributed to the prevailing wage were confounded by other differences between projects, such as size or type of construction. Comparing the wages of individual workers on prevailing wage and non-prevailing wage projects means the results are unaffected by other variations in the projects. Another advantage of this approach is that it controls for any offset in productivity. To the extent that contractors substitute toward more productive inputs, the increased productivity is observed. For example, contractors may hire more productive workers under the prevailing wage who can complete the work in fewer hours. By comparing the prevailing wages and non- prevailing wages of the same workers, the more productive inputs are observed. There- fore, any wage difference would not be offset by fewer hours of work.

There are a number of limitations to this approach as well. First, estimates of the effect on construction costs will be underestimated because in the absence of the prevailing wage requirement, contractors would likely alter the mix of inputs, which would tend to lower costs further. The comparison of wages also underestimates the impact because the costs of the other contractors who might have won the bid in the absence

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of the prevailing wage requirement cannot be observed. By comparing the wages that the workers are paid versus their normal wages, it is possible to see what the winning contractor could have charged in the absence of prevailing wages. However, another contractor might have bid lower in the absence of the prevailing wage law. This potential lower bid cannot be observed.

A second limitation is that it is not clear how workers who are paid the same wage on non-prevailing and prevailing wage jobs should be interpreted. Perhaps the prevailing wage law had no effect. This would occur, for example, if the prevailing wage was a nonbinding constraint. Also, the winning contractor may always pay at or above the prevailing wage, but another contractor who pays below the prevailing wage rate would have had the lower bid in the absence of prevailing wages. In the absence of prevailing wages, the second contractor might have the low bid. The competitive advantage is eroded, however, when the second contractor is required to pay higher wages. In this case, prevailing wage laws increase construction costs, but the cost difference cannot be observed.

V. Data

To collect the wage data, letters were sent to primary contractors for 345 public projects in Kentucky. Three groups of projects were sampled: state education projects, road projects, and state non-road projects. Within each group, projects were selected randomly. All were subject to Kentucky's state prevailing wage law. The sample was limited to projects that had construction activity in either 1999 or 2000. This time period was chosen after several contractors indicated that it would be difficult to retrieve payroll records prior to 1999. Primary contractors were asked to provide payroll records for any work done on the selected project. The payroll records were to include the individuals working on the projects, their wage rates, and job classifica- tions. The primary contractors were also asked to provide a list of all subcontractors working on the project so they could be contacted as well. The payroll records provided a list of the population of workers employed by each contractor on the projects. Once the payroll records for the projects were received, workers who were employed on each project were randomly selected. The contractors were then sent a follow-up letter asking them to provide payroll records on the selected workers for work done on non-prevailing wage projects during the same time period as the prevailing wage project.~ This process provided a record of what individual workers were paid on prevailing wage projects and what the same workers were paid on non-prevailing wage projects during the same time period and by the same contractor.

Many of the projects originally selected did not have any work performed during 1999 or 2000. This occurred because records showing start and completion dates that were kept by the state did not always accurately reflect the timing of construction. In total, 38 of the projects in the original sample were confirmed to have had no construction work during 1999 or 2000. There may have been additional projects with no work during this period for which no response was provided by the contractor. Payroll data for both the selected project and non-prevailing wage projects were


obtained for 46 projects, for a response rate of 15 percent. The final sample represented 56 contractors and 267 workers.

Although the number of projects and contractors represented in the data is low, the sample appears to be reasonably representative with respect to size. t-tests of the mean dollar value of projects showed that there was no statistical difference between those for which data were collected and those for which no data were collected. Using the Bureau of Labor Statistics' Quarterly Census of Employment and Wages data, which provides wage data on workers covered by unemployment insurance, t-tests of the mean number of workers employed by the primary contractors was performed to determine if there was a statistical difference between respondents and nonrespon- dents. For primary contractors on road and state non-road projects there was no statistical difference. The t-statistics were -0.47 and 0.21, respectively. Primary contractors on education projects who responded were larger than those who did not respond (t = 1.70). These results suggest that, with the exception of the education projects, the samples do appear to be representative based on observable characteristics. While the education sample may be more representative of larger contractors, the data still provide evidence as to the effects of Kentucky's prevailing wage laws on construction costs.

VI. Results

Sixty percent of the workers sampled were paid more on the prevailing wage projects than they were paid on non-prevailing wage projects during the same time period (Table 1). In all categories of prevailing wage projects more than half of the workers were paid more when they worked on prevailing wage projects. Some workers ( 12 percent over all projects) were actually paid less on prevailing wage projects. 2 The mean difference in hourly wage rates for these workers was $0.58. The remaining 28 percent of the workers were paid the same wage on both prevailing wage and non-prevailing wage projects. Instances of workers being paid more on prevailing wage projects occurred for 87 percent of the projects sampled and 81 percent of the companies sampled. The weighted mean of all wages actually paid for work on the prevailing wage projects was $19.78 per hour. The weighted mean of wages paid to the same workers on non-prevailing wage projects was $16.10 per hour. The difference of $3.68 was statistically significant. The results for each of the categories of projects were similar.

Although the relatively low response rate for these data raises the concern that the results might not be generalizable to the entire population of contractors, the results still provide information on the effects of prevailing wage laws on construction costs. First, assume that the contractors who did not respond tend to pay on average less than the prevailing wage. In this case, the difference in wage rates estimated may be biased, but would still be positive. Alternatively, it might be assumed that all of the contractors who did not respond paid workers the same on both types of projects and only those who responded paid more on prevailing wage projects. In this case, the estimated difference of $3.68 would be too high, but again the difference in wages would be positive.

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Table 1

Comparison of Wages Paid on Prevailing Wage Projects to Wages Paid on Non-Prevailing Wage Projects for the Same Worker

Road State Non-Road Education All Projects Projects Projects Projects

Direction of Difference Prevailing Wage Less

than Non-Prevailing Wage 13% No Difference 17% Prevailing Wage Greater than

Non-Prevailing Wage 70%

13% 10% 12% 27% 38% 28%

60% 52% 60%

Wages Prevailing Wage Projects

Mean $21.61 $17.83 $19.97 $19.78 Non-Prevailing Wage Projects

Mean $16.59 $14.01 $16.82 $16.10 Difference in Mean Wages $5.02 $3.82 $3.15 $3.68 t-value for paired test of differences* 9.85 6.91 8.73 14.15

Sample Size (Workers) 84 40 143 267

Notes: The comparisons show the difference between the wages individual workers were paid on prevailing wage jobs and the wages they were paid on non-prevailing wage jobs during the same time period. Payroll data on prevailing wage projects were collected for work pertbrmed in 1999 or 2000. Non-prevailing wage data for the same workers were collected for the same time period. *All tests of differences were significant at the 0.01 level.

The observed wage differences are consis tent with the f indings of Kess ler and Katz (2001) and Thieblot (1996). Both studies found that the relat ive wages of construction workers dec l ined after states r epea led their p reva i l ing wage laws. These studies, however, used wage data for the general construct ion labor market. Kessler and Katz (2001) at tempted to control for state and time fixed effects and demographic variables. Given the amount of unexp la ined var ia t ion that exis ts in a typica l wage equation, this approach is open to the cr i t ic ism that even with all of these controls there may be some important unobserved variable contr ibuting to the difference. The results above, however, specifically show a wage difference result ing from prevai l ing wage laws for many of the workers e m p l o y e d on pro jec t s covered by p reva i l i ng wages. Because both non-preva i l ing wages and p reva i l ing wages obse rved are for the same individual during the same t ime period, there is no need to p rov ide additional controls. Any variation in the wages earned on prevai l ing wage jobs and non- prevai l ing wage jobs are l ike ly the result of the p reva i l ing wage requirement . This suggests that the lower wages after the repeal of the prevai l ing wage laws observed by Kessler and Katz (2001) and Thieblot (1996) were, at least in part, the result of the repeal of prevail ing wage.


It might also be argued that the differences observed in the Kentucky data may be attributed to differences in public and private construct ion projects. I f the construction of public projects is different from the construction of private projects in some way that requires different wages to be paid, differences between prevailing wages and non-prevailing wages might be observed. Although these types of differences may contribute to the observed differences in wages, they cannot account for all of the difference. The decrease in wages observed by Kessler and Katz (2001) when states repealed prevailing wage laws would not have occurred if differences in the construction of public versus private projects explained all of the differences in the wages earned on public and private projects.

Kessler and Katz (2001) also concluded that union members accounted for most of the decrease in wages. This is consistent with O'Connell (1986), who concluded that the federal Davis-Bacon Act increases the bargaining power and, therefore, the wages of union members. In many cases, union contractors pay the same wages on non- prevailing wages as are paid on prevailing wage projects. The findings of Kessler and Katz (2001) and O'Connell (1986) suggest that the wage differences observed in this study might be larger if it were possible to observe the wages of union members in the absence of prevailing wage laws. Pettersen (2000: 246) also found that prevailing wage laws increased "wages and benefits, with the largest percentage increase going toward employer pension contributions." This also suggests that the wage difference above underestimates the prevailing wage law's effect on public construction costs as it does not account for mandated benefits.

Table 2 shows the wages that were paid to sampled workers on the prevailing wage projects during 1999 and 2000. The effects of the prevailing wage law on construction costs can partially be observed by applying the wage differences for each worker to the hours each worked. This provides an indication of what wage costs could have been in the absence of the prevailing wage requirement. Over all sampled

Table 2

Total Wage Costs of Sample Workers with Prevailing Wages and Hypothetical Wage Cost Using Wages Paid on Non-Prevailing Wage Projects

Road State Non-Road Education All Wage Costs Projects Projects Projects Projects

With Prevailing Wage Rate $94,197 $129,862 $216,714 $440,773 With Non-Prevailing Wage Rate $73,337 $102,862 $178,544 $354,744

Difference $20,860 $27,000 $38,169 $86,029 Percent Difference 28% 26% 21% 24%

Note: The hypothetical wage costs reflects what the wage cost would have been if the sampled workers were paid the same wage rate they earned on non-prevailing wage projects during the same time period. The figures represent only the wage costs associated with the sampled workers.

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projects, the sampled workers were paid approximately $86,000 more than they would have been if they were paid the same wage they earned on non-prevailing wage projects, suggesting that prevailing wages increased the wage cost for these projects by 24 percent. It is important to note that this is an increase in the wage cost, not the project's total cost. 3

The observed wage differences also have important implications for the debate over whether prevailing wages increase construction quality. By mandating higher wages, higher quality construction workers might be employed. Mandating higher wages, however, does not guarantee higher quality construction. For example, Allen (1984, 1987) found that unions are sometimes able to use their market power to bargain for wages that are above labor's contribution to the value of construction. In these cases, wages are not tied to marginal product as they would be in a competitive labor market. Therefore, higher wages do not necessarily signal higher quality. Metzger and Goldfarb (1983) concluded that requiring prevailing wages would not necessarily improve quality as contractors may substitute toward lower quality materials. They did not, however, provide any indication as to whether this was likely.

Even in areas where wages do reflect workers ' marginal product, mandating that higher wages be paid does not ensure that workers with greater skills are hired. Non-prevailing wages represent the wage level paid by the private market. In a competitive market, the non-prevailing wage should equal the value of the workers' marginal product. As the wage comparison above showed, 60 percent of the workers sampled were paid above the wage that they earn on non-prevailing wage projects. In the extreme case, one worker who normally earned $8 per hour on non-prevailing wage projects was paid $22.50 per hour on a prevailing wage project. This worker was being paid $14.50 more than the market valued his work. This occurs because prevailing wages laws set minimum wages, not minimum levels of quality. By setting a minimum wage, prevailing wage laws may increase the probability that a higher quality worker is hired, thus potentially increasing the quality of construction. It does so in an inefficient manner, however, because often lower quality workers are still employed and simply paid a wage that exceeds the value of their marginal product.

VII. Conclusion

The effect of prevailing wage laws on public construction costs and quality of construction are two major issues debated when policymakers consider prevailing wage laws. With a few exceptions, the bulk of the economic literature suggests that prevailing wage laws increase construction costs. A comparison of the wages paid to construction workers employed on prevailing wage projects in Kentucky to the wages they are paid on non-prevailing wage projects supports this conclusion. Workers were paid an average of $3.68 more per hour when they worked on prevailing wage projects than they were paid for non-prevailing wage projects. This difference supports the conclusion that the public construction costs would be lower in the absence of prevailing wage laws.

736 J O U R N A L OF L A B O R R E S E A R C H

T h e w a g e c o m p a r i s o n a l s o i n d i c a t e s tha t , to t h e e x t e n t t h a t p r e v a i l i n g w a g e

i n c r e a s e s the q u a l i t y o f p u b l i c c o n s t r u c t i o n , it d o e s so i n e f f i c i e n t l y . W h i l e it m a y b e

a r g u e d tha t p a y i n g h i g h e r w a g e s r e s u l t s in h i g h e r s k i l l e d w o r k e r s , in m a n y c a s e s t h e

p r e v a i l i n g w a g e s i m p l y r e su l t s in l o w e r w a g e w o r k e r s b e i n g p a i d m o r e t h a n t h e y c a n

ea rn on p r i v a t e p r o j e c t s . In t h e s e ca se s , t he w a g e s p a i d to a c h i e v e the a d d i t i o n a l q u a l -

i ty o n p u b l i c p r o j e c t s is h i g h e r t h a n w h a t is p a i d on p r i v a t e p r o j e c t s f o r the s a m e l e v e l

o f qua l i ty .

N O T E S

*This research was done originally for the Program Review and Investigations Committee of the Kentucky State Legislature. I thank the staff of the Program Review and Investigations Committee and the Legisla- tive Research Commission for assistance with data collection and Mark Berger for helpful comments. Due to confidentiality requirements, the data cannot be made available.

qdeally, the comparison should include differences in the fringe benefits paid on the prevailing wage project to the fringe benefits the workers earn on non-prevailing wage projects. Fringe benefits for prevailing wage projects are set at an hourly rate, Merit shop contractors, however, do not typically pay fringe benefits on an hourly rate. Rather, benefits are provided in discrete amounts that may not vary based on hours worked. Due to the difficulty in expressing fringe benefits provided on non-prevailing wage projects as an hourly rate, fringe benefits are not included in this study.

2This can occur if wages paid for a prevailing wage project do not reflect raises that may occur after the project is begun or if an individual worked on a prevailing wage project in an earlier time period than on the comparable non-prevailing wage project.

3To calculate the percent increase in total costs would require the total cost during 1999 and 2000. Many of the projects had work occurring before or after this period. The timing made it difficult to obtain reliable figures on the total construction cost for a specific period.

R E F E R E N C E S

Allen, Steven G. "Much Ado About Davis-Bacon: A Critical Review and New Evidence." Journal of Law and Economics 26 (October 1983): 707-36.

- - . "Unionized Construction Workers Are More Productive." Quarterly Journal of Economics 99 (May 1984): 251-74.

- - . "Can Union Labor Ever Cost Less?" Quarterly Journal of Economics 102 (May 1987): 347-73.

Azari-Rad, Hamid, Peter Philips, and Mark Prus. "Making Hay When It Rains: The Effect Prevailing Wage Regulations, Scale Economies, Seasonal, Cyclical, and Local Business Patterns Have on School Construction Costs." Journal of Education Finance 27 (Spring 2002): 997-1012.

�9 "State Prevailing Wage Laws and School Construction Costs." Industrial Relations 42 (July 2003): 445-57.

Bilginsoy, Cihan, and Peter Philips. "Prevailing Wage Regulations and School Construction Costs: Evidence from British Columbia." Journal of Education Finance 24 (Winter 2000): 415-32.

Fraundorf, Martha Norby, John P. Farrell, and Robert Mason. "The Effect of the Davis-Bacon Act on Con- struction Costs in Rural Areas." Review of Economics and Statistics 66 (February 1983): 142-46.

M I K E C L A R K 737

Goldfarb, Robert S. and John F. Morrall III. "The Davis-Bacon Act: An Appraisal of Recent Studies." Industrial and Labor Relations Review 34 (January 1981): 191-206.

Gould, John P. and George Bittlingmayer. The Economics of the Davis-Bacon Act: An Analysis o f Prevail- ing Wage Laws. Washington DC: American Enterprise Institute lbr Public Policy Research, 1980.

Kessler, Daniel P. and Lawrence F. Katz. "Prevailing Wage Laws and Construction Labor Markets." Indus- trial and Labor Relations Review 54 (January 2001): 259-74.

Metzger, Michael R. and Robert S. Goldfarb. "Do Davis-Bacon Minimum Wages Raise Product Quality?" Journal of Labor Research 4 (Summer 1983): 265-72.

Nelson, Richard R. "State Labor Legislation Enacted in 1997." Monthly Labor Review 121 (January 1998)" 3-22.

. "State Labor Legislation Enacted in 1999." Monthly Labor Review 123 (January 2000): 3-19.

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The effects of prevailing wage laws: A comparison of individual workers’ wages earned on and off...

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