Ohio prevailing wage costs taxpayers, more reform needed

Greg R. Lawson Jul 18, 2013

The Buckeye Institute has long questioned the value brought to Ohio taxpayers by Ohio’s prevailing wage law. As far back as 1996, we were making the case that a law that forces a state or local government to pay above-market wages on major construction projects makes little sense. It is especially concerning that what is termed “prevailing wage” is anything but a market-based mechanism for determining adequate compensation. Rather, it a bureaucratically developed rate based upon union wages in various geographic regions of the state.

Whenever an Ohio governmental entity sends out construction bids, it must include the relevant prevailing wage. Further, the government entity then has to designate one of its own employees to serve as a “Prevailing Wage Coordinator” responsible for monitoring the operations of the contractor that secured the winning bid and enforcing the payment of the prevailing wage.

The origin of prevailing wage laws can be found in the problematic Keynesian responses put forward by both Presidents Hoover and Franklin Roosevelt in the wake of the Great Depression to artificially inflate prices. In addition to this rationale, which would be appropriate for the dustbin of history, there was another, more insidious motivation guiding some in Congress when the Davis-Bacon Act, which created the federal prevailing wage, was initially passed.

In a report for the Mackinac Center, Dr. Richard Vedder comments on this,

Another ‘argument’ for the original Davis-Bacon legislation and no doubt many of the state prevailing wage laws was Northern union contractors’ desire to be protected from competition from lower-wage, Southern, non-union workers. In fact, Rep. Robert Bacon was prompted to introduce his bill in 1931 after witnessing one contractor’s use of black Alabama laborers to construct a government hospital in Rep. Bacon’s Long Island district. A review of the legislative history of the Davis-Bacon Act makes it clear that the idea behind ‘prevailing wages’ was seen by some congressmen as a way to reduce out-of-state competition and discourage the use of non-white labor. One congressman who supported Davis-Bacon actually made reference to the ‘problem’ of ‘cheap colored labor’ on the floor of the U. S. House.

Leaving aside the ignoble origins of the Davis-Bacon Act, the core problem today for taxpayers is that prevailing wage makes projects more expensive. How much more? Significantly more. 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: “A distribution of estimated savings by county indicates that 36 percent of the savings occurred on projects located in rural counties and 64 percent occurred on projects located in urban counties.”

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 inflated 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 had 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.Continuing down the path to reform, Ohio lawmakers significantly increased the thresholds for which application of prevailing wage applies in the previous biennial budget bill, House Bill 153 of the 129th General Assembly.

The threshold for new construction of a public improvement other than roads was increased from $78,258 (the previous statutory amount was $50,000 as adjusted by the Director of Commerce over the years) to $250,000 over three years. The dollar threshold for repairs, reconstruction or improvements was increased from $23,477 to $75,000 over three years.

While this was a further positive step, more reform is needed. In an era where tax dollars are ever more important and Ohio’s tax burden still places it at an overall economic disadvantage, policymakers should be seeking every way possible to do more with less. Ohio no longer needs a prevailing wage law and it is doubtful that it ever did. It would be good public policy to move towards its elimination.