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Research & Commentary: Ending Prevailing Wage Could Save Michiganders Millions

May 2, 2018

In this Research & Commentary, Matthew Glans examines a referendum that would repeal Michigan’s prevailing wage.

A referendum that would repeal Michigan’s prevailing wage is being hotly debated in Lansing, with both parties fighting over its placement on the ballot. A prevailing wage is the average wage paid to laborers in a designated region. Prevailing wage requirements force contractors to provide union wages and benefits on government-funded construction projects, such as schools or roads. Once passed, the prevailing wage becomes the mandated minimum wage for all government-contracted workers, and any contractor paying less than the prevailing wage faces fines or loss of the contract.

Currently, 22 states do not have prevailing wage laws, and several states have recently eliminated their laws by legislative action or because of a court’s ruling.

When governments mandate higher wages for government-contracted workers, contractors have less money available to pay other workers. Prevailing wages guarantee higher labor costs, which benefit a small amount of people working on government-contracted projects. Unfortunately, the burden of these costs is transferred to others in the form of lower wages and higher prices for contracted goods and services. Federal prevailing wage laws force taxpayers to spend $8.6 billion more than they otherwise would have to for public construction projects, according to a 2008 study by the Beacon Hill Institute.

The Michigan referendum has been slowed by lawsuits challenging the validity of signatures required to trigger the ballot initiative, a political ploy used by the advocates of expanding government who vehemently oppose a repeal of prevailing wages.

Michigan could save millions in construction project costs by merely abolishing its prevailing wage laws. In a 2013 study, the Anderson Economic Group estimated the impact of Michigan’s prevailing wage laws on the average annual expenditures for construction of K–12 and higher-education facilities over a 10-year period. The findings were grim: Prevailing wages would cost Michigan taxpayers $2.24 billion in the 10-year span.

Similar savings were found in other states as well. Nevada’s prevailing wage law increased the cost of public works projects by $625 million in 2009 and $346 million in 2010, according to a 2011 study from the Nevada Policy Research Institute. Since the Ohio General Assembly exempted school construction projects from the state’s prevailing wage law in 1998, construction costs imposed on taxpayers have been greatly reduced. In 2002, the Ohio Legislative Service Commission examined the effects of this change and found exempting Ohio schools from the prevailing wage law saved the government $487.9 million over a four-year period, from 1998 to 2002.

Prevailing wage laws are a form of centralized planning and wage control that increases government-contracted construction projects costs, reduces competition, and politicizes public projects. Government projects are often criticized for exceeding their allotted budget, and prevailing wage laws are a significant factor of the increased costs. These laws force contractors to set unnecessarily high labor rates, often without any consideration for the type of work being done or employee skill levels.

Prevailing wage laws reduce competition, increase construction projects costs, and encourage waste and cronyism. Taxpayers are the biggest losers in this government-sanctioned scheme, and government-contracted workers and corrupt politicians are the only ones reaping the benefits. Prevailing wage requirements should be stopped immediately, and in its place, market forces should determine what workers deserve to be paid.

The following articles explain the origins and effects of prevailing wage laws.
 

The Federal Davis-Bacon Act: The Prevailing Mismeasure of Wages
http://www.beaconhill.org/BHIStudies/PrevWage08/DavisBaconPrevWage080207Final.pdf  Four researchers for the Beacon Hill Institute conclude in this study the U.S. Department of Labor inflated the prevailing wage on average by about 22 percent, causing an increase in construction costs of about 10 percent. States without prevailing wage laws almost always have lower construction costs than those with prevailing wage laws.

The Impact of Michigan’s Prevailing Wage Law on Education Construction Expenditures
https://www.heartland.org/policy-documents/impact-michigans-prevailing-wage-law-education-construction-expenditures
The Anderson Economic Group estimates the impact of Michigan’s prevailing wage law on the average annual expenditures for construction of K–12 and higher-education facilities in Michigan over a 10-year period.

Prevailing Wage Reform in Pennsylvania
https://www.commonwealthfoundation.org/issues/detail/prevailing-wage-reform-in-pennsylvania
This Policy Points article from the Commonwealth Foundation argues prevailing wage laws are an unnecessary mandate that limits the number of construction jobs while inflating costs for state government, local governments, and school districts.

The Effects of Michigan’s Prevailing Wage Law
https://www.heartland.org/policy-documents/effects-michigans-prevailing-wage-law
Paul Kersey of the Mackinac Center examines Michigan’s prevailing wage law and argues for repeal, claiming the law adds unnecessary costs to construction projects at taxpayers’ expense.

Prevailing Wage Repeal is Sound Policy
https://www.mackinac.org/21311
Michael D. LaFaive of the Mackinac Center discusses the effort to repeal Michigan’s prevailing wage and argues it is likely to eventually free up money for more road, school or other government construction projects.

Prevailing Wage Laws: Public Interest or Special Interest Legislation?
http://heartland.org/policy-documents/prevailing-wage-laws-public-interest-or-special-interest-legislation
This comprehensive study by George C. Leef of the Cato Institute, details the background and current data on the effects of prevailing wage laws in the United States. Leef’s research shows the laws “increase costs and reduce efficiency” as competition is squeezed out of the market.

Delaware’s Prevailing Wage: A Long History of Taxpayer Abuse
http://criblog.wordpress.com/2011/11/13/delaware%E2%80%99s-prevailing-wage-a-long-history-of-taxpayer-abuse/
Describing the problems prevailing wage laws have caused in Delaware, an analyst at the Caesar Rodney Institute notes the Delaware Department of Labor’s methodology for determining the minimum wage skews the prevailing wage toward higher, union wages and overestimates the prevailing wage by an average of 23 percent (and 40 percent for construction workers).

The Effects of the Exemption of School Construction Projects from Ohio’s Prevailing Wage
https://www.heartland.org/policy-documents/effects-exemption-school-construction-projects-ohios-prevailing-wage-law
The Ohio Legislative Services Agency reports repealing the state’s prevailing wage law achieved $488M in savings during a five-year period, a 10 percent reduction in construction costs.

Prevailing Wage Laws: Public Interest or Special Interest Legislation?
https://www.heartland.org/policy-documents/prevailing-wage-laws-public-interest-or-special-interest-legislation
George Leef of the Cato Institute investigates whether prevailing-wage laws are truly in the public interest or are merely an instance of rent-seeking by a politically potent interest group using its influence to create a government-enforced price-fixing scheme. Leef concludes prevailing-wage laws favor special interests by concentrating benefits and dispersing costs. He argues they should be repealed.

Who Really Prevails Under Prevailing Wage?
http://www.npri.org/publications/who-really-prevails-under-prevailing-wage
Geoffrey Lawrence of the Nevada Policy Research Institute argues Nevada’s prevailing wage law adds substantially to the cost of the state’s public infrastructure: “As a result, fewer public funds are available to construct additional projects or to help alleviate fiscal stress within state and local governments. Instead, lawmakers channel hundreds of millions in tax dollars each year to benefit unionized construction labor—with some of that money, of course, subsequently flowing back into the same politicians’ campaign coffers.”

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website at https://www.heartland.org/publications-resources/newsletters/budget-tax-news and The Heartland Institute’s website at http://www.heartland.org.

Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute State Government Relations Manager Lindsey Stroud at lstroud@heartland.org or 312/377-4000.

Article Tags
Employment
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR