Before getting too far along, the answer to the title of this post is probably: “not really.” Over the past few years, a few states have repealed their prevailing wage laws on public projects. The expectation was to lower the cost of public projects through a combination of lower wages and an increased number of bids. The more bidders and the lower the wages, the lower the project will cost, right?
Well, not so fast my friends! A recent study on Indiana construction projects shows that the equation might not be so simple. Read on for a brief discussion on the findings of the prevailing wage study.
First, let’s take a quick look at what prevailing wage laws are, then we’ll move on to the Indiana study.
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What are Prevailing Wage laws?
Here’s the quick version: Prevailing wage laws require that workers on public projects are paid a certain minimum amount, and that amount is set by the “prevailing” local averages. It can get complicated, but basically, it requires that contractors working on a public project in a certain area of the country must pay their employees a wage that is in line with what those employees could expect to be paid for similar work on a private construction project in the same area. The goal of prevailing wage laws is to prevent government contractors from reducing wages for local construction workers.
People have a lot of feelings on prevailing wage laws, and compelling arguments can be found on both sides of the spectrum on the matter. However, one thing appears to be clear — simply repealing prevailing wage laws doesn’t guarantee a drop in project cost.
Why the push for repeal?
Cost! Those in favor of repeal cite the requirement of prevailing wages as an artificial inflation of labor costs for public projects. The argument can mostly be boiled down to this: if the labor costs aren’t artificially increased by prevailing wage laws, the cost of public projects will drop. Plus, other competitors will be able to bid on public projects – further pushing the price down (at least in theory).
Indiana study shows eliminating prevailing wages has little effect on overall project cost
The Indiana Study (link below) took a look at public construction projects in Indiana since the state’s prevailing wage laws were repealed in 2015. Obviously, this isn’t a huge sample size – the study spanned only about two years and appears to have been focused only on Northern Indiana. In any event, the results were still pretty telling: project prices stayed the same, the number of bids dropped a little, and the number of unskilled workers on these jobs increased.
Price. You may be thinking, “How did the price not drop?!” Well, wages only make up about 20% of the project cost. So, if no one was paid anything, the resulting savings would be about 20%. Of course, this means that saving some small amount on wages would result in a relatively small impact on the total project price. Plus, as we’ll look at in a second, the quality of that labor drops, too. Lower pay = lower interest from high performers. Additionally, lower-skilled workers are less efficient workers.
Number of Bids. This one is pretty simple. Prior to the repeal of prevailing wage laws, there was an average of about 3 bids on northern Illinois public projects. In the years following, the number moved to 2.9 bids on these projects. It’s a small difference. However, considering an increase the number of bids is a major argument for those who want prevailing wage repeal, a move in the wrong direction is a bad look.
Drop in Skilled Workers. Skilled workers cost more money. Unskilled workers cost less. When you’re allowed to pay unskilled labor even less than you had to before, the natural reaction is to bring on more unskilled labor in favor of skilled labor. According to the study, the highest hourly-wage workers saw no effect on their pay, the mid-level wage workers saw a 7% reduction in wages, and the lowest on the totem pole saw a whopping 15% reduction in wages. However, “you get what you pay for.” Lower skilled workers may cost less per hour, but not all man-hours are created equally — these workers are also less efficient. So, savings are lost since these workers won’t be as efficient as the workers they replace. Not to mention, high and medium-skilled workers will have other opportunities. Opportunities that pay better.
Editor’s Note: Special thanks to the Midwest Economic Policy Authority who published the study: The Effects of Repealing Common Construction Wage in Indiana. It’s long, but it’s loaded with pertinent, interesting information. The Kansas City Star also has a nice article on the topic.
Obviously, this single study in one state that merely covers a two-year period isn’t conclusive. But it does highlight some interesting points about how cutting the cost of labor won’t automatically result in savings.
It makes sense: higher-paid or mid-level workers can decide not to work on public jobs if their pay will drop. Factor in that there’s a shortage of skilled construction workers available throughout the country and you can imagine these skilled workers would be in great demand to work on other jobs. To drop the cost of public projects, methods other than “pay workers less” must be employed.
We’re talking about making projects more efficient through leveraging P3 projects, lean construction processes, and eliminating distractions like construction payment disputes. The construction industry is ripe for a productivity boom – and better productivity and efficiency would lead to lower construction prices.