Give Locals Control on Prevailing WageMar 30, 2017
The Buckeye Institute has long questioned Ohio’s prevailing wage law and suggested numerous ways the law could be improved. Simply put, prevailing wage mandates that government pay above market rates for labor on public construction projects. This means less construction in many communities, and fewer jobs. As local governments complain vociferously over reductions in revenue sharing from Columbus, the need for reform has never been stronger.
Senator Matt Huffman (R- Lima) has introduced Senate Bill 72 to help deal with this issue.
SB 72 is a very simple piece of legislation that echoes one of our recommendations in our 2015 report, Repairing Ohio’s Prevailing Wage Law. It offers local governments, institutions of higher education, and specialty districts the flexibility to decide whether they want to pay prevailing wage on a given construction project or not. Other reforms suggested in the report included modifications to the calculation of prevailing wage, including using market compensation rates as opposed to only union contracts. Of course, the ideal policy would be not to have a prevailing wage law at all.
While more can be done, the policy contained in SB 72 represents a major step in the direction of good public policy.
The main problem with prevailing wage is that it makes projects more expensive for taxpayers. A significant contributor to the higher cost is the mechanism through which the prevailing wage is calculated. The state agency responsible for these calculations, the Department of Commerce, takes an overly narrow view of wages. By looking only at union wages and collective bargaining agreements, the law overstates the price of labor because union wage rates include funding for union pension plans. In other words, market prices are generally ignored and competition is stifled. This means, as anyone familiar with economics knows, higher costs.
So how much higher?
A 2010 CATO Journal article refers to multiple academic studies that highlight the increases. For example:
A subsequent study in Michigan by Paul Kersey (2007) examined the difference between the ‘prevailing rates’—which in Michigan must be union rates—and the wages of workers in the same lines of work as determined by wage surveys conducted by the U.S. Bureau of Labor Statistics (BLS). He found that on average, the rates that were mandated on state construction projects were 39 percent higher than the median wages in the construction industry (Kersey 2007: 9). For example, the median hourly rate for carpenters in Wayne County (the Detroit area) in 2005 according to the BLS, adjusted to include fringe benefits, was $26.33, but the prevailing rate under Michigan law was $41.37 (Kersey 2007: 24). If the state had allowed competitive bidding, the costs for virtually every class of construction labor would have been significantly lower. Kersey (2007: 18) also estimates that if Michigan municipalities had not imposed prevailing wage requirements, they would have saved $16 million that year.
Ohio has already seen significant savings by modifying its prevailing wage laws. For example, in 1997 the General Assembly specifically exempted school construction and renovation from the prevailing wage law. A 2002 report on the impact of suspending prevailing wage for school projects by the non-partisan Legislative Service Commission found aggregated savings of $487.9 million.
While advocates for prevailing wage argue that the higher costs benefit taxpayers by ensuring that the various projects are constructed in a “safer” or higher “quality” manner, it is dubious that prevailing wage, rather than existing regulatory requirements and market incentives, is responsible for safety and quality outcomes. The regulatory requirements for workplace safety such as OSHA apply even in the absence of prevailing wage rates, and every contractor has a significant incentive to avoid accidents that will drive up their worker’s compensation insurance rates.
As for the quality argument, the LSC Prevailing Wage study found that 91 percent of school administrators that used competitive bidding between 1999 and September 2000, did not notice a difference in quality. In fact, 6 percent noticed an improvement compared to only 3 percent that noticed a decline.
Those that want to use the prevailing wage, for whatever reason, can certainly continue to do so with the policy that would be implemented under SB 72. For those that wish to stretch their dollars further, and very possibly meet more community needs by developing more projects, this flexibility will prove essential.