Prevailing wage laws: public interest or special interest legislation?

• Author: Leef, George C.
• Position: Report

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.

--Adam Smith (1776)

The public policy of the United States is broadly in favor of competition. Our antitrust laws are premised on the idea that in the absence of such legislation private interests would seek to create monopolies, fix prices, restrain trade, and stifle competition. Moreover, the federal government, as well as the states and municipalities, has laws mandating competitive bidding on government contracts to guard the public against "sweetheart deals" that squander tax dollars. Open competition, in fact, is usually the undoing of those conspiracies against the public that Adam Smith saw as so prevalent.

One glaring exception to the general rule favoring competition is "prevailing wage" laws. Those laws mandate that on government construction projects, the labor component will not be subject to competitive bidding; rather, the wages paid to the various classes of construction labor are set by government officials at rates determined to prevail in the job site's locality--typically, prevailing union wages. Labor wages and benefits are thus removed from competition by operation of law.

Are prevailing wage laws a reasonable deviation from our general rule in favor of competition? Do they actually reflect the public interest, with benefits that outweigh the costs? Or are they merely an instance of rent seeking by a politically potent interest group, using its influence to use the law to enforce a price fixing scheme? This article concludes that the latter of those questions captures the truth. Prevailing wage laws favor special interests by concentrating benefits and dispersing costs. They ought to be repealed.

The Davis-Bacon Act

Enacted in 1931, the Davis-Bacon Act (40 U.S. Code [section] 276) is the federal prevailing wage statute, requiring that contractors on federal construction projects must pay at least the wages and benefits found to be "prevailing for the corresponding classes of labors and mechanics" employed. The statutory language does not specify how this determination is to be made, leaving that to the Secretary of Labor. The "prevailing" rates do not necessarily have to be those of construction unions, but often they are. The Labor Department's method for determining "prevailing" rates has been widely criticized for giving far too little weight to lower, nonunion rates that many construction workers in the area receive. Glassman et al. (2008: 38), for example, conclude that the wage survey method in use "employs unrepresentative survey and measurement methods that produce wages estimates that are biased upward." Precisely how the government sets the rates, however, is much less important than the fact that contractors are forbidden to pay workers less even if their workers would accept a lower rate. The devil here is not in the details, but in the concept.

The genesis of the Davis-Bacon Act (named for its sponsors, Pennsylvania Senator James Davis and New York Representative Robert Bacon, both Republicans) was the construction of a Veterans Bureau Hospital on Long Island in 1927. The contractor who won the bid was from Alabama and employed many black workers. Representative Bacon was bothered that construction workers in his district had lost out on the job and he introduced a bill that would prevent the use of migrant labor on federal projects. The bill did not pass in that session, but he kept reintroducing it.

In 1930, with the nation's economic depression deepening rapidly, Bacon's bill found strong support in the House and Senate. The hearings and debate on the legislation revealed some ugly racial overtones with comments on how "cheap colored labor" was driving down wages of white workers (Bernstein: 1993). Proponents played on racial animosity to increase support, but the skin color of the construction workers competing with local firms was of little importance; the very fact of competition was the problem. The bill was passed and President Herbert Hoover signed it into law on March 31, 1931. His motives had nothing to do with the race of the workers competing for jobs. Rather, the bill appealed to him because it was consistent with his theory that high wages caused prosperity and conversely that competition led to wage reductions that were exacerbating the depression. (1)

State and Local Prevailing Wage Laws

Today 31 states and the District of Columbia enforce prevailing wage laws. Most were enacted during the New Deal but some predate it (e.g., New York's law, which was passed in 1897), and some were enacted after World War II, with Minnesota's being the most recent (1973). Nine states have never had such laws (Georgia, Iowa, Mississippi, North Carolina, North Dakota, South Carolina, South Dakota, Vermont, and Virginia), and in nine others they have been repealed (Florida, Alabama, Utah, Arizona, Colorado, Idaho, New Hampshire, Kansas, and Louisiana). In Oklahoma, the prevailing wage law was held to violate the state's constitution in 1995 on the grounds that it impermissibly delegated authority to federal officials (Oklahoma City v. State ex rel. Department of Labor, 918 P.2d 26) and has not been enforced since. Prior to that litigation, the Oklahoma Commissioner of Labor had uncovered widespread fraud in the submission of data on which prevailing wage determinations were made (Cook 2005: 219). In addition, many cities, particularly those where organized labor is politically strong, have prevailing wage laws.

The state prevailing wage laws vary greatly. In states where organized labor is relatively weak (e.g., Nebraska), the wage determinations are close to the competitive market rates. Conversely, in states where organized labor is powerful (e.g., New Jersey), the prevailing wage law mandates rates that are close to or even exactly the same as construction union rates.

There would appear to be a conflict between state and local prevailing wage laws, which suppress competition in bidding on construction work, and the pro-competition federal antitrust statutes. That conflict, however, is readily resolved. Only private conduct is subject to the antitrust laws. For example, price fixing by attorneys through a bar association was held to violate the Sherman Antitrust Act in Goldfarb v. Virginia State Bar (421 U.S. 773 [1975]) since the minimum fee schedules for legal work at issue were not mandated by state law. If, however, a unit of government acts to suppress price competition, that is beyond the reach of the Sherman Act, as the Supreme Court held in Parker v. Brown, (317 U.S. 341 [1943]). Prevailing wage statutes are therefore legally permissible and organized labor has used them to diminish competition.

The Effects of Prevailing Wage Laws: Higher Costs and Lower Efficiency

The most salient effect of prevailing wage laws is to raise the cost of public construction. They do so in several ways. First, by preventing competitive bidding on the labor costs of public projects, a greater outlay of tax dollars is required to pay the construction workers employed than would otherwise be necessary. Second, prevailing wage laws often interfere with efficient labor utilization because their enforcement mandates adherence to union work rules. Third, they impose additional compliance costs, including litigation, on contractors. And fourth, prevailing wage laws require additional administrative costs in determining what wage rates "prevail" and also adjudication and enforcement costs.

Numerous studies have examined the impact of prevailing wage laws and found that they add significantly to the cost of government construction projects; conversely, when such laws are suspended or repealed, costs fall.

In Michigan, a state with a particularly severe and expansive prevailing wage law, a federal district court ruled in 1994 that the law was in conflict with the federal Employee Retirement Income Security Act (Associated Builders and Contractors v. Perry, 869 F. Supp. 1239). That decision was overturned by the Sixth Circuit Court of Appeals in 1997 (Associated Builders and Contractors v. Perry, 115 F.3d 386), but the 30-month time period while the law was suspended allowed for a an excellent "apples to apples" comparison...