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An Analysis of House Bill 1073: Proposed Legislation to Alter Prevailing

Wages in the State of Washington

Submitted to

Billy R. Wallace, Jr.

Political & Legislative Director

Washington & Northern Idaho

District Council of Laborers

By

Kevin Duncan, Ph. D.

Professor of Economics

Colorado State University-Pueblo

February 16, 2015

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About the Author

Kevin Duncan, Ph.D. Kevin Duncan is Professor of Economics, Hasan School of Business, Colorado State University-Pueblo

where he specializes in labor, and regional economics. He received his

Ph.D. from the University of Utah in 1987 and his B.A. from the University

of California, Riverside in 1981. Duncan is the author of over 60 academic

papers and applied regional projects and is the winner of several honors and

awards including the Provost’s Award for Excellence in Teaching, the

Provost’s Award for Excellence in Scholarship, the Outstanding Faculty

Member Award for the Hasan School of Business, the Enterprise Rent-A-

Car Student Choice Award for Excellence in Teaching, the Dean’s Advisory

Council Award for Outstanding Faculty Member, as well as the Dean’s Award for Excellence in

Teaching. His research on prevailing wage laws has appeared in leading international and national peer-

reviewed journals such as Construction Management and Economics, Industrial and Labor Relations

Review, and Industrial Relations. He has provided expert testimony to the Colorado, Hawaii, and

Vermont state legislatures on policies related to construction labor markets. His research was referenced

by the California Senate President pro Tem, Darrel Steinberg, in support of SB7 (2013) that extends the

payment of prevailing wages on public works to charter cities. He has also provided data and analysis to

the Legislative Auditors Office during the review of Minnesota’s prevailing wage law. He has authored

numerous economic impact studies that examine the effect of California’s pharmaceutical industry,

Amtrak’s Southwest Chief, America’s Cup Races in San Diego, project labor and local hire agreements

(in California, Colorado, and Hawaii), state and municipal prevailing wage laws (in California and the

City of San Jose), the Colorado State Fair, CSU-Pueblo, the installation and operation of wind energy

towers, the nonprofit sector, as well as the impact of the proposed Colorado Amendment 61. He has

served on the Advisory Board for Economic Impact Analysis of the Colorado Nonprofit Association. He

teaches regional economics where his students learn economic impact analysis.

Table of Contents

Executive Summary……………………………………………………………3

Introduction: Current Prevailing Wage Policy and Proposed Changes.….4

Cost Impact of Prevailing Wages……………………………………………..9

Economic Impact of Prevailing Wages………………………………………17

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Executive Summary

House Bill 1073 requires the use of a random stratified sampling methodology in the

determination of prevailing wage rates for state-funded construction and establishes fines for survey

recipients that do not submit requested wage data. Random stratified sampling is advantageous when

groups within the overall population differ significantly. This survey technique requires that each group

is sampled in its proportion to the overall population. The challenges in meeting this requirement and

using random stratified sampling in the determination of prevailing wages are illustrated with data and

other information on Washington’s construction industry. Surveying requires careful consideration and

resources. HB 1073 does not provide any guidance regarding the identification of subgroups or other

information about the construction industry that would be useful in random stratified sampling. If the

sampling is not conducted properly, prevailing wage rates will not be accurate and complaints will arise.

The current survey method used by the Department of Labor and Industries avoids the challenges,

expense, and problems associated with switching to a random stratified sampling approach. Concerns

about the current survey method can be addressed by increasing survey response rates. Rather than

introduce a new approach that fines recipients for not responding to survey requests, the legislature may

consider other methods of encouraging prevailing wage survey participation under the current method.

House Bill 1073 is motivated by the assumption that a decrease in prevailing wage rates is

associated with a decrease in construction costs. This assumption is not supported by research that is

based on statistical analyses of construction cost data. The preponderance of peer-reviewed research

indicates that prevailing wages do not cause higher construction costs. Other studies indicate that

construction costs do not decrease when prevailing wages decrease, or when the wage policy is repealed.

Research shows that construction wages and construction worker productivity are linked. When wages

decrease, unskilled construction workers replace skilled workers, less capital equipment is utilized, and

material and fuel costs increase in ways that offset the cost savings of lower wages. Information from the

U.S. Census Bureau, the most reliable and publicly available data on construction costs, indicates that

labor costs are approximately 18% and 25% of the overall costs of building schools and highways in

Washington. These are the types of projects most affected by the state’s prevailing wage law. The data

and research suggest that, since labor costs are a low percent of total construction costs, relatively small

changes in labor productivity and construction efficiency are needed to offset higher prevailing wages.

The purpose of Washington’s prevailing wage policy is to protect local wage standards from

being undercut when the infusion of government spending attracts low-wage contractors from other areas.

In this sense the prevailing wage law creates a level playing field by requiring that all contractors pay the

same wages. Economic impact studies indicate that prevailing wage laws are associated with increased

use of local contractors and construction workers. The spending of these individuals contributes to local

retail and service businesses, to additional area employment, and to local tax revenue. Prevailing wages

redirect tax dollars back into the local economy in a way that benefits businesses and employees that are

not directly related to the construction industry. In this way prevailing wages can be considered built-in

economic development policy. Research indicates that weakening the state’s prevailing wage law will

not reduce the cost of state-funded construction, but will reduce the economic benefits that are enjoyed by

the citizens of Washington.

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Introduction: Current Prevailing Wage Policy and Proposed Changes.

Washington’s Prevailing Wage Policy is partly modeled after the federal Davis-Bacon

Act.1 The purpose of these acts is to create a wage floor to ensure that construction workers will

not see their wages and benefits undercut as a result of government spending practices. The

infusion of state or federal dollars into an area, along with a process that rewards low bids, may

depress wages by attracting contractors from other areas. These contractors may undercut local

wage standards by importing lower paid workers or by offering less pay to local workers. The

prevailing wage floor protects construction workers’ pay and benefits and establishes a level

playing field for contractors who are bidding on government projects. The State of Washington

currently uses a majority/average rule in determining prevailing wages. If the same wage rate is

paid for the majority of hours worked for a detailed job classification in the largest city in a

county, that rate is the prevailing wage. If there is no majority wage, then the average wage rate,

weighted for hours worked, is the prevailing wage.2 Under House Bill 1073, the current

majority/average method used in determining prevailing wage rates would be replaced by a

method where prevailing wages would be proportional to the percentages obtained from the

random stratified sample.3

1 See a description of the state law at: http://www.lni.wa.gov/IPUB/700-032-000.pdf. See The Davis-Bacon Act

Protecting Wage Equality Since 1931. Accessed at:

http://www.dol.gov/whd/programs/dbra/Survey/conformancefaq.htm. 2 See Washington State Legislature, WAC 296-127-019, Survey Methodology, accessed at:

http://apps.leg.wa.gov/WAC/default.aspx?cite=296-127-019. 3 For example, if 60% of the wages for the hours worked in a detailed job classification are the same (say, $20 per

hour) and the remaining 40% of wages paid for the same job classification are the same (say, $10 per hour), under

the current policy, the prevailing wage would be $20 per hour since this is the majority wage. Under HB 1073, the

prevailing wage would be proportional to the percentages of high and low wages, or it would be $16 = ($20 x 0.6) +

($10 x 0.4).

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House Bill 1073, an act relating to improving the accuracy of the prevailing rate of wage,

would require the use of a random stratified sampling methodology in the determination of

prevailing wage rates on state-funded construction.4 Random stratified sampling is advantageous

when sub-populations, or groups within the overall population differ significantly. This

technique is widely used in political polling. For example, if a racial minority group tends to

vote differently than the majority, and if data from the U.S. Census Bureau indicates that the

minority represents 30% of the population, common sense and random stratified sampling tells

us that 30% of those surveyed should be from the minority group. A challenge in extending this

survey method to prevailing wages is the scarcity of accurate and current data needed to

determine the proportions of different wage earning groups in the construction industry. While it

is relatively easy to use demographic information from the U.S. Census to identify percentages

for minority groups, deriving the same information about the construction industry would require

the Washington Department of Labor and Industries to engage is substantially more surveying

and data collection.

Random stratified sampling is not a short-cut. For this sampling technique to be

effective, it is very important that the each group is sampled to its proportion to the overall

population. As is illustrated below, it is very challenging to obtain this information for the

Washington construction industry. 5 If the survey is not conducted properly, prevailing wage

rates will not be accurate and complaints will arise. Surveying requires careful consideration and

resources. House Bill 1073 does not provide any guidance regarding the identification of

4 See http://lawfilesext.leg.wa.gov/biennium/2015-16/Pdf/Bills/House%20Bills/1073.pdf. 5 Problems associated with the subjective decisions involved in identifying the subgroups for prevailing wages based

on random stratified sampling have been addressed by a previous Department of Labor and Industries statistician.

See the briefing paper by Miriam Moses accessed at:

http://rebound.org/pages/papers_detail.cfm?pageid=18&paperid=9.

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subgroups or other information that can be used to identify wage differences in the construction

industry.

To illustrate the challenges associated with the use of random stratified sampling in the

determination of prevailing wages in Washington, consider a simple example of stratification by

contractor size. This kind of grouping would be useful if wage rates vary substantially between

large, medium, and small contractors. The first challenge is to determine the percentage

breakdowns for large, medium, and small contractor establishments within a county.6 This

information can be obtained from the U.S. Census Bureau’s County Business Patterns.7 For

example, in Kittitas County, there are 181 construction contractors. There are 151

establishments with 1-4 employees, 23 contracting companies with 5-9 employees, and 6

companies with 10-19 employees. There are no contracting companies in this county with more

than 19 employees. The data for this county indicate that about 83% of contractors are very

small (those with 1-4 employees). However, in King County, only 69% of contractors have

between 1-4 employees and there are numerous contractors with more than 19 employees.

Under random stratified sampling, prevailing wages in Kittitas County would be influenced by

the large (83%) of very small contractors with 1-4 employees. Since the percentage of very

small contractors in King County is lower (69%), the prevailing wage rates in this county should

be based on this lower rate. This example illustrates how prevailing wages can be influenced by

the percentages of small contractors in a county. But, since the distribution of large, medium,

and small contracting companies varies between counties, the Department of Labor and

6 For example, if 20% of all firms are large, 30% are medium, and 50% are small, and if 100 firms are to be

surveyed in the county, then data should be collected from 20 large firms, 30 medium, and 50 small firms. The

firms to be surveyed in each group should be randomly selected. 7 Data from the County Business Patterns can be accessed at: http://www.census.gov/econ/cbp/index.html.

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Industries would need to collect random stratified samples (based on varying percentages of

large, medium, and small establishments) from each county. The surveying needed to obtain this

information would demand considerable resources.

This simple example can be used to identify other problems associated with the use of

random stratified sampling. The data used in the example above are from 2012, the most recent

information available from County Business Patterns. Since that time the number of contractor

establishments has changed in Washington. A unique effect of the Great Recession was the

substantial decrease in the number of business establishments, particularly in the construction

industry. For example, before the last recession there were 201,340 contracting establishments

in Washington’s construction industry.8 By June of 2012 (about the time the data from the

County Business Patterns was collected), the number had fallen to 132,363. The most recent

data from June of 2014 indicates that the number of construction establishments has increased to

153,627. As the number of contracting firms has increased since the time of the collection of the

County Business Patterns data, it is very likely that the distribution of large, medium, and small

contractor establishments has also changed. Consequently, the percentages of large, medium,

and small contracting establishments used in determining prevailing wages under this method

will not be timely or accurate.

There are numerous other issues associated with the use of random stratified sampling.

The percentages of large, medium, and small contractor establishments available at the county

level may not reflect the distribution of large, medium, and small contractors that participate in

state-funded construction projects. For example, if prevailing wages in Kittitas County are

8 See the Quarterly Census of Employment and Wages (U.S. Department of Labor, Bureau of Labor Statistics)

accessed at: http://www.bls.gov/cew/.

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influenced by 83% of contractors that are very small, and if very small contractors do not

participate in state-funded construction in this county, the prevailing wage rate will not be

accurate. The data described above are based on all construction within a county. Data

regarding the size of specialty trade contractors are not available. However, these data are

needed to determine prevailing wages for detailed job classifications. The example presented

above is based on one stratification (contractor size), but additional sub-groups may be needed.

Given the differences in wages earned by union and nonunion construction workers, additional

stratification may be desired that identifies contractors that are, and are not signatory to

collective bargaining agreements. While it is possible to collect data on contractor establishment

size, data on unionization rates are not available at the county level or at the level of detailed job

classifications.9 In this case, and in many others where data on group percentage breakdowns are

not available, the Department of Labor and Industries statistician would be ‘flying blind’ when

determining prevailing wages. Survey groups may also be identified based on the number of

contracts awarded, corporate income, and a variety of other factors. As more groups are

included the sample size in each group will become smaller since House Bill 1073 establishes a

7.5% net sample.10

9 The unionization data that is available at the state level for the construction industry is provided with a warning of

small sample sizes and the recommendation that the information be used cautiously. See unionstats.com accessed

at: http://unionstats.gsu.edu/. This issue illustrates a fundamental challenge associated with random stratified

sampling. If the percentages of union and nonunion construction workers for a detailed job classification in a county

are not known, then there is no guidance regarding the appropriate percentages used in determining prevailing

wages. Consequently, the sample is random as opposed to random and stratified. 10 HB 1073 calls for an initial random survey of 30% followed by a stratified survey of 25% of the initial

respondents, or 7.5% (25% x 30%). The issue of small sample sizes in also mentioned in the testimony by former

Department of Labor and Industries statistician Miriam Moses accessed at:

http://rebound.org/pages/papers_detail.cfm?pageid=18&paperid=9 .

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The irony is that the current survey method used in the determination of prevailing wages

is capable of avoiding the challenges, expense, and problems associated with switching to a

random stratified sampling approach. With high survey response rates under the current method,

if there is no majority wage rate, the average prevailing wage will be proportional to the rates

paid by large, medium, and small contractors, or between union and nonunion contractors, etc.

Furthermore, this information can be collected without the subjective decisions required of the

Department of Labor and Industries statistician to identify sub-groups. Under the current method

all parties involved in state-funded construction have the right and responsibility to participate in

wage surveys. If a party feels that prevailing wages are not proportional to the true distribution

of wages in a county, this party can initiate improvements by participating in the survey and

encouraging others to do the same.

The issue of basing Washington’s prevailing wages on a random stratified sample has

surfaced previously.11 It is time to put the issue of random stratified sampling to rest unless the

legislature is prepared to fully fund a complete survey. Rather than introduce a new approach

that fines recipients for not responding to survey requests, the legislature may consider other

methods of encouraging prevailing wage survey participation under the current method.

Cost Impact of Prevailing Wages.

House Bill 1073 appears to be motivated by the assumption that lower prevailing wage

rates will be associated with lower construction costs. This assumption is not supported by peer-

11 See Senate Bill 5248 from the 2003 legislative session.

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reviewed research that is based on examination of construction cost data and other publicly

available information on the construction industry.

First, labor costs are a low percent of total costs in the construction industry. The most

reliable data on construction labor costs can be obtained from the U.S. Census Bureau’s

Economic Census of Construction.12 These data are derived from a survey of construction

contractors in every state, every five years. For example, data from the most recent Economic

Census of Construction indicates that labor costs are approximately 18.2% of the net value of

construction for commercial and institutional building construction in Washington. 13 This is the

category that includes school construction. Also, labor costs are about 24.5% percent for

highway, street, and bridge construction in the state. These data are consistent with U.S. Census

Bureau information from other states. For example, Professor Peter Philips reports that labor

12 See the U.S. Census Bureau, Economic Census of Construction, Construction: Geographic Area Series: Detailed

Statistics for Establishments, accessed at:

http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23A1&prodType

=table. 13 The Economic Census of Construction for 2007 does not report labor costs as a percent of total costs. This ratio

must be calculated based on other data. Here, labor cost as a percent of total construction cost is derived by dividing

total construction worker payroll, plus proportionally allocated total fringe benefits, by the net value of construction

work. The net value of construction is based on the value of work completed by a contractor, less the value of work

subcontracted to other contractors. The Economic Census of Construction defines construction worker payroll as

the gross earnings paid in the reporting year to all construction workers on the payroll of construction

establishments. It includes all forms of compensation such as salaries, wages, commissions, dismissal pay, bonuses,

and vacation and sick leave pay, prior to deductions such as employees' Social Security contributions, withholding

taxes, group insurance, union dues, and savings bonds. See Construction: Geographic Area Series: Detailed

Statistics for Establishments: 2007. Accessed at:

http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23A1&prodTyp

e=table. The Economic Census of Construction defines the net value of construction as the receipts, billings, or

sales for construction work done by contractors, less the value of construction work subcontracted to others. The net

value of construction does not include contractor business receipts from retail and wholesale trade, rental of

equipment without operator, manufacturing, transportation, legal services, insurance, finance, rental of property and

other real estate operations, and other nonconstruction activities. Receipts for separately definable architectural and

engineering work for others are also excluded. Nonoperating income such as interest, dividends, the sale of fixed

assets, and receipts from other business operations in foreign countries are also excluded. See Construction:

Geographic Area Series: Detailed Statistics for Establishments: 2007. Accessed at:

http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23A1&prodTyp

e=table.

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costs range between 17% and 20% for selected building types in Kentucky.14 I have reported

elsewhere that labor costs are approximately 22% of the net value of construction for highway,

street, and bridge construction in Colorado.15 Consequently, changes in prevailing wage rates

affect a very small percent of total project cost.

Second, the preponderance of peer-reviewed research finds that prevailing wages are

unrelated to total construction costs. This report will focus on those studies that have examined

the effect of prevailing wages on building schools and highways indicates that prevailing wages

are unrelated to construction costs. For example, in examinations of thousands of public schools

built in states with and without prevailing wage standards, professors Azari-Rad, Philips, and

Prus find that building schools with prevailing wages are no more costly than building

comparable schools without the wage requirement.16 In the early 1990s the Province of British

Columbia introduced a prevailing wage standard that allows for a unique “natural experiment”

regarding the introduction of the wage standard within a jurisdiction. This policy was

comparable in strength to the Washington state prevailing wage policy.17 The effect of this

policy has been extensively examined. For example, professors Bilginsoy and Philips compare

the cost of building public schools before and after the introduction of the British Columbian

14 See Peter Philips, “Kentucky’s Prevailing Wage Law: An Economic Impact Analysis,” January 2014. 15 See Kevin Duncan, “The Effect of Federal Davis-Bacon and Disadvantaged Business Enterprise Regulations on

Highway Maintenance Costs,” Industrial and Labor Relations Review, January, 2015, Vol. 68, No. 1, pp. 212-237.

Accessed at: http://ilr.sagepub.com/content/68/1.toc. 16 See Hamid Azari-Rad, Peter Philips and Mark Prus, “State Prevailing Wage Laws and School Construction

Costs.” Industrial Relations, 2003, Vol. 43, pp. 445-457 and Hamid Azari-Rad, 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, 2002, Vol.27, pp.

997-1012. 17 See Kevin Duncan, Peter Philips, and Mark Prus, “Using Stochastic Frontier Regression to Estimate the

Construction Cost Inefficiency of Prevailing Wage Laws,” Engineering, Construction and Architecture

Management, 2012, Vol. 19, No. 3, pp. 320-334.

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wage policy and report that schools built under the wage regulations were no more expensive

than schools that were not covered by the policy.18

Along with professors Philips and Prus, I have examined the effect of the British

Columbian policy on the cost and productivity of building schools. For example, we compare

the cost of building public schools covered by the wage policy to the cost of building private

schools that were not covered by the policy. Public schools were approximately 40% more

expensive to build than comparable private schools before and after the wage policy.19 One

explanation of stable construction costs with the introduction of prevailing wages is that the

productivity or efficiency of construction increases along with wage rates. We find evidence of

this trend. For example, average efficiency for all public school construction in British

Columbia was 95% during the early and mid 1990s. Construction efficiency on public schools

covered by the first stage of the SDFW was 87%. Technical efficiency on projects covered by

the expansion of the British Columbian wage policy, 17 months later, was 99.8%.20 These

results indicate that the introduction of this prevailing wage law was associated with an

interruption in the efficiency of construction. But, contractors restored overall efficiency in a

relatively short period of time.

In an examination of Pennsylvania’s prevailing wage requirement, Mr. Keller and

Professor Hartman find that the wage policy adds, on average, 2.25% to the cost of building

18 See Cihan Bilginsoy and Peter Philips, “Prevailing Wage Regulations and School Construction Costs: Evidence

from British Columbia.” Journal of Education Finance, 2000, 24, 415- 432. 19 See Kevin Duncan, Peter Philips, and Mark Prus, “Prevailing Wage Regulations and School Construction Costs:

Cumulative Evidence from British Columbia” Industrial Relations, 2014, Vol. 53, No. 4, pp.593-616. 24 See Kevin Duncan, Peter Philips, and Mark Prus, “The Effects of Prevailing Wage Regulations on Construction

Efficiency in British Columbia,” International Journal of Construction Education and Research, 2009, Vol. 5,

No.1, pp. 63-78.

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public schools in the Keystone State.21 In an examination of 3,000 schools built nationwide,

professors Vincent and Monkkonen report that construction costs are from 8% to 13% higher in

states with prevailing wage policies.22 However, both of these studies have errors that result in

prevailing wage cost estimates that are too high. To estimate the effect of prevailing wages on

total construction costs, Keller and Hartman compare labor costs under open-shop conditions to

labor costs with prevailing wage rates, assuming that the number of labor hours and labor

productivity do not change with wage rates. This assumption is contrary to what research tells

us. For example, professors Blankenau and Cassou find that the use of skilled and unskilled

construction labor is very sensitive to wage rates.23 When construction wage rates increase,

more skilled and productive construction workers are used instead of less skilled workers.

Professors Balistreri, McDaniel, and Wong also find that when wages increase and more skilled

construction workers are employed, more capital equipment and machinery is used in

construction.24 Consequently, when construction wages increase, for whatever reason, more

productive workers are used along with more equipment. These changes also alter hours

worked. Therefore, the labor cost and prevailing wage cost effect reported by Keller and

Hartman is too high. On the other hand, professors Vincent and Monkkonen do not take into

account changes in construction costs over the business cycle in their measurement of the

prevailing wage cost effect. Professors Azari-Rad, Philips and Prus find that when the

21 See Edward Keller and William T. Hartman, “Prevailing Wage Rates: the Effects on School

Construction Costs, Levels of Taxation, and State Reimbursements.” Journal of Education Finance, 2001, Vol.27,

pp. 713-728. 22 See Jeffrey Vincent and Paavo Monkkonen, “The Impact of State Regulations on the Cost of

Public School Construction,” Journal of Education Finance, 2010, Vol. 35, No. 4, spring, pp. 313-330. 23 See William Blankenau and Steven Cassou, “Industry Differences in the Elasticity of

Substitution and Rate of Biased Technological Change Between Skilled and Unskilled Labor.” Applied Economics,

2011, Vol. 43, pp. 3129-3142. 24 See Edward Balistreri, Christine McDaniel and Eina Vivian Wong, “An Estimation of U.S. Industry-

Level Capital-Labor Substitution Elasticities: Support for Cobb-Douglas.” The North American Journal of

Economics and Finance, 2003, Vol. 14, No. 3, 343-356.

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unemployment rate in a state increases (doubles) during a recession, construction costs decrease

by 21%. 25 Consequently, if states with prevailing wage requirements also have lower

unemployment rates, the prevailing wage cost estimate reported by Vincent and Monkkonen is

too high.

Less research has been conducted on the effect of prevailing wage rates on highway

construction costs. However, the results of this research are consistent with the preponderance of

research on school construction costs. I have compared the cost of federal and state-funded

highway resurfacing projects in Colorado.26 While state and federal projects are built to the

same quality and safety standards, highway projects funded by the federal government are also

covered by Davis-Bacon prevailing wage requirements and by Disadvantaged Business

Enterprise requirements.27 While federal highway resurfacing projects are more expensive, these

projects are also larger and more complex. When complexity and size differences are taken into

account, there is no statistically significant difference in the costs of state or federally funded

projects. Results of this study also indicate that the additional regulations on federal projects

have no effect on the level of bid competition, and important determinant of construction costs.

My other research, in progress, indicates that contractors do not lower their bids when they

switch from more regulated federally funded highway resurfacing projects, to less regulated

25 See Hamid Azari-Rad, 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, 2002, Vol.27, pp. 997-1012. 26 See Kevin Duncan, “The Effect of Federal Davis-Bacon and Disadvantaged Business Enterprise Regulations on

Highway Maintenance Costs,” Industrial and Labor Relations Review, January, 2015, Vol. 68, No. 1, pp. 212-237.

Accessed at: http://ilr.sagepub.com/content/68/1.toc. 27 This policy establishes targets for the participation of subcontracting firms owned by minority and socially

disadvantage groups in federally funded construction. See U.S. Department of Transportation DBE Program

accessed at: http://www.dot.gov/osdbu/disadvantaged-business-enterprise.

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projects funded by the State of Colorado.28 This finding also provides evidence that

construction costs are not affected by federal Davis-Bacon and Disadvantaged Business

Enterprise policies.

Of particular relevance to House Bill 1073, is my current research on highway

resurfacing projects that examines the cost effect of a change in prevailing wages from union to

average wage and benefit rates.29 For example, from at least the mid 1990s to April of 2002,

prevailing wage and benefit rates for the detailed job classifications involved in highway

resurfacing projects in Colorado were based on union rates. From April 2002 until the next

prevailing wage survey in the fall of 2011, average wage and benefit rates prevailed. This

change applied to 11 of the 13 detailed job classifications involved in highway resurfacing and

represented an average 18% decrease in total hourly compensation for these categories. Despite

this substantial decrease in the overwhelming majority of the wages paid for highway

resurfacing, there was no corresponding decrease in the cost of federally funded resurfacing

work relative to comparable state-funded projects.

Other researchers have also found that construction costs do not decrease when prevailing

wage rates decrease, or when state-level prevailing wage laws are appealed. For example,

Professor Wial examined the effect of a change in Pennsylvania’s prevailing wage survey and

wage determination.30 Before the survey change in the mid 1990s, union wage and benefit rates

usually prevailed in most counties. After the change, union rates continued to prevail in some

28 See Kevin Duncan, “Do Federal Davis-Bacon and Disadvantaged Business Enterprise Regulations Affect

Aggressive Bidding? Evidence from Highway Procurement Auctions.” Currently under publication consideration

at the Journal of Public Procurement. 29 See Kevin Duncan, “Do Construction Costs Decrease When Davis-Bacon Prevailing Wages Change from Union

to Average Rates?” Working Paper, Colorado State University-Pueblo. 30 See Howard Wial, “Do Lower Prevailing Wages Reduce Public Construction Costs,” Keystone Research Center,

July, 1999.

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counties, but switched to lower rates in other counties. Wials’ examination of these changes on

school construction costs indicates that, while lower wage and benefit rates were intended to

save taxpayers money, there was no measureable relative cost impact.

In an examination of construction costs in Kentucky, Michigan, and Ohio during periods

in the 1990s when prevailing wage policies for school projects changed within these states,

Professors Philips finds that there was no statistically significant difference in school

construction costs associated with a change in prevailing wage policies. 31 Professor Philips also

reports that the value added per construction worker, a measure of labor productivity, is 14%

higher in states with prevailing wage laws, construction job-related disabilities are 12% higher in

states without prevailing wages, and repeal of prevailing wages is associated with a substantial

decrease in the kind of apprenticeships that are associated with future productivity growth.32

Taken together, the studies examining the effect of decreases in or the elimination of

prevailing wages reveal that these changes are not associated with reduced construction costs.

Why would this occur? As described above, the research by professors Blankenau, Cassou,

Balistreri, McDaniel, and Wong indicate that as construction wages decrease, so does the use of

skilled construction workers as well as the use of equipment. Both of these changes tend to

decrease construction worker productivity. While wage rates decrease on state-funded projects,

when prevailing wages are decreased or eliminated, construction worker labor productivity

decreases in a way that increases construction costs.

31 All of these findings are reported in Peter Philips, “Kentucky’s Prevailing Wage Law,” January 2014. 32 When comparing construction industry outcomes in states with and without prevailing wages, it is important to

recognize that the differences cannot be entirely attributed to the wage policy. Rather, prevailing wage standards are

part of a set of integrated and complementary institutions that contribute to a construction workforce that is trained,

productive, stable, and where the construction industry finances more of pension and health benefits instead of

shifting these costs to the rest of society.

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Another way to illustrate the effect of changes in prevailing wage rates on construction

costs is to examine component costs between states with and without meaningful state-level

wage policies. Along with Mr. Alex Lantsberg, I have used data from the Economic Census of

Construction to compare construction cost components between states with differing wage

policies. We find that in states with weak or no prevailing wage requirements, construction

worker labor costs and fringe benefits are each lower by approximately two percentage points

compared to states with average or strong prevailing wage policies.33 Value added per

construction worker is about 10% lower in these states with weak or no prevailing wages. The

combined costs of materials, fuels, and equipment rentals are approximately 3 percentage points

higher in states without meaningful prevailing wage standards. These data suggest that higher

material and fuel expenses may be a consequence of the increased use of less productive labor in

those states with less than average prevailing wage laws. Regardless, the data from the

Economic Census of Construction suggests that states without effective prevailing wage laws

have lower labor costs, but also have lower labor productivity and other construction cost

components that are higher.

Economic Impact of Prevailing Wages.

As explained above, the purpose of Washington’s prevailing wage policy is to protect

wage standards from being undercut by low-wage contractors from other areas. In this sense the

prevailing wage law creates a level playing field by requiring that all contractors pay the same

wage rates. Economic impact studies indicate that more local contractors and construction

workers are employed when prevailing wages apply. This creates a benefit to local economies as

33 See Kevin Duncan and Alex Lantsberg, “Building the Golden State: The Economic Impacts of California’s

Prevailing Wage Policy.” To be released by SmartCitiesPrevail.org, February 2, 2015.

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local tax dollars, used to finance capital construction projects, are also used to employ more

contractors and construction from the area. The spending of these individuals contributes to

local retail and service businesses, to additional area employment, and to local tax revenue.

My examination of library construction in Santa Clara County, California indicates that,

when prevailing wages applied, 39% of contractors employed on these projects were located in

the county.34 When prevailing wages did not apply, only 23% of contractors had county

business addresses. Since local contractors are more likely to hire county-resident construction

workers, prevailing wages redirect local tax dollars into the economy. The examination of 16

library projects financed by the City of San Jose (located in Santa Clara County), indicates that,

if these projects had not been built under the city’s prevailing wage standard, economic activity

in Santa Clara County would decrease by approximately $11 million. Employment of county-

resident construction workers would decrease by about 80 jobs. With reduced spending in the

county, employment in local retail and service industries would decrease by approximately 25

jobs. With a reduction in economic activity, county sales and property tax revenue would

decrease by about $128,000. This economic impact analysis is based on the IMPLAN input-

output software. This is the leading economic impact software and is based on observed

spending patterns.35

As described above, Mr. Lantsberg and I have examined differences in construction

spending between states with average or strong prevailing wage standards to those states with

weak or without construction wage policies. In addition to the differences in wage and material

costs described above, states with average and strong prevailing wage laws have more

34 See Kevin Duncan, “An illustration of the Impact on the Santa Clara County Economy of Repealing the

Prevailing Wage Policy of the City of San Jose.” Submitted to Working Partnerships USA, February 11, 2011. 35 See http://implan.com/.

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subcontracting conducted by in-state establishments. For example, 96.5% of subcontracting is

completed by in-state businesses in Western states with meaningful prevailing wage laws. In

those western states with weak or no prevailing wage requirements, in-state subcontracting is

92.4%. Higher levels of in-state subcontracting are associated with the retention of more state

tax dollars and increased economic activity in states with average and strong prevailing wage

laws.

Most states employ contract award processes based on the low bid. In the absence of

prevailing wage requirements, this practice is associated with market failure that drives

construction worker wages and benefits down. As explained above, states with weak or no

prevailing wage laws have labor costs and fringe benefit rates that are each lower by two

percentage points. On the other hand, the profits of contracting companies in these states are

higher by 0.5%. These data suggest that prevailing wage laws correct the market failure

associated with awarding contracts based on low bids by altering the distribution of wage and

profit income. The IMPLAN software can be used to measure the impact of this redistribution.

Because individuals with lower incomes spend more in a region, and more of the spending of

higher income earners leaks out of the area economy, higher wages and lower profits are

associated with increased economic activity. When construction workers earn higher pay,

spending increases in local retail and service industries which typically include a large number of

small businesses.

To illustrate the economic impact of the redistribution of wage and profit income, the

greater use of in-state subcontractors, and other spending changes associated with prevailing

wage laws, we consider California’s construction industry if this state were to switch from the

characteristics of the average state with at least average prevailing wage requirements to the

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average state without meaningful prevailing wage laws. If this switch were to take place,

economic activity in the Golden State would decrease by $1.4 billion and state-wide employment

would decrease by about 17,500 jobs.36

Prevailing wages redirect tax dollars back into the local economy in ways that benefit

businesses and employees that are not directly related to the construction industry. In this way

prevailing wages can be considered built-in economic development policy. Legislators may

chose to weaken the state’s prevailing wage law by altering the survey method. If so, research

tells us that the cost of state-funded construction will not decrease, but productivity will, and job-

related injuries in the industry will increase. The earnings of a greater number of construction

workers in the state will decrease as will economic activity. Workers and small businesses that

are not directly related to the construction industry will experience increased unemployment and

reduced sales. The earnings of a few construction contractors will increase. If the legislature is

interested in creating a benefit for a few at the expense of many, this can be achieved by

weakening Washington’s prevailing wage policy.

36 Others have also examined the economic impact of prevailing wage laws. See Alison Quesada, Frank Manzo,

Dale Belman and Robert Bruno, “A Weakened State: The Economic and Social Impacts of Repeal of the Prevailing

Wage Law in Illinois.” University of Illinois AT Urbana-Champaign, School of Labor and Employment Relations,

Labor Education Program.