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ECONOMIC IMPACT OF PREVAILING

WAGE REGULATIONS

Kirk Bingenheimer

Department of Construction Science and Management

Clemson University

Clemson, South Carolina

Introduction

There has been growing debate over the past few years on the merit of the Davis-Bacon Prevailing Wage Act. Enacted in 1931 during the Great Depression, the Davis-Bacon Act protected construction workers on federally funded construction projects from being paid less than wages that prevailed in a given community. Before 1985, the Secretary of the Labor Department defined the prevailing wage as the wage paid to at least 30 percent of the majority of the workers in a particular trade. If no majority existed, a weighted average was used for the wage paid to workers in a particular trade. In 1985, the method of calculating the prevailing wage changed to 50 percent of the majority.

In 1979, the General Accounting Office published a report entitled "The Davis-Bacon Act should be repealed." This study found that significant changes in the Nation's economical conditions and the economic character of the construction industry since 1931, plus the passage of other wage laws, make the Davis-Bacon Act unnecessary. The study went on to recommend that Congress should ren in outlays over a five-year period. Other recommendations offered by ABC included wage survey improvements, federal preemption of higher state prevailing wage rates, and restriction of the Davis-Bacon Act to federally funded construction projects only. The coalition includes groups such as the American Subcontractors Association, National Association of Home Builders, the Associated General Contractors of America, and the U.S. Chamber of Commerce.

With all this controversy surrounding the Davis-Bacon Act it apparently has an economic impact on the United States. Estimates from the government, academia and associations place the added cost of federal construction projects in the billions of dollars due to the requirements of the Davis-Bacon Act.

With interest in the economic impact of the Davis-Bacon Prevailing Wage Act, this research document seeks to investigate the economic impact, if any, on an existing state prevailing wage act. At the time this research was conducted, thirty-two states plus the District of Columbia has prevailing wage acts (Figure 1). These so called "Little Davis-Bacon Acts" set prevailing wage rates on any construction project funded by state and/or local governments. This researcher chose to investigate the potential economic impact of the New Jersey State Prevailing Wage Act. The rationale for choosing New Jersey is that it is one of only four states that determines prevailing wage rates by the collective bargaining agreements of the individual trades. This is a rare prevailing wage determination. Most states with prevailing wage acts calculate wages by the modal rate (most frequent); the median rate (middle rate); the average rate; the weighted average or the majority rate (50, 40 or 30 percent of the majority) similar to the Davis-Bacon determination.

Problem Statement

According to research conducted by the Wharton School, there are two basic arguments against the development of prevailing wage laws. First, is the inconsistent application because many employees, such as clerical and supervisory, are not offered the benefits of wage protection. Second, the perceived need for wage protection is based on unreasonable fears that competition produces low wage rates. This assumes that employers are able to unilaterally control wage rates with no regard to market factors.

Prevailing wage laws have strict regulations on wage payment and employment classification which contractors must follow on government funded contracts. Violation of any of these regulations subjects the contractor to the risk of civil or criminal prosecution. These requirements make government contracting riskier than most other types of contracting.

Because wage payment requirements on prevailing wage projects are predominantly higher than non-prevailing wage projects, the overall impact is to increase the cost of construction to governments and governmental agencies. According to Mark Erlich, a union carpenter and author, "Repeal of prevailing wage laws would be a tax-saving measure that would introduce free-market principles into an unnecessarily regulated industry." A Massachusetts Associated Builders and Contractors advocate once painted a picture of needed senior citizen centers and children's libraries not being built without repeal of the prevailing wage law in Massachusetts.

According to an interview by the Wharton Industrial Research Unit in 1982, New Jersey has one of the most pervasively pro-union prevailing wage statutes. This is at least partially attributable to the fact that the individual who has been the Assistant Commissioner of Labor in charge of administering the New Jersey State Prevailing Wage Act for more than twenty years, is staunchly pro-union: "No bones about it, I am a union man." When interviewed in June of 1982, the Assistant Commissioner expressed the opinion that prevailing wage statutes are specifically for protecting union employees, and if they do not adopt the union scale, they are of no value. By adopting these union scales, workers on state funded construction projects are paid higher wages than projects not requiring the union scales because non-union pay scales are typically lower.

The pro-labor orientation of the law's administrators is shared by members of the judiciary, including the federal court judiciary in New Jersey. In a 1981 district court opinion, the federal judge concurred that "the purpose of the Act is to prevent unfair competition by non-union employers with unionized employers providing similar goods or services, by payment of wages below those paid to union employees."

The primary objective of this research document is to determine the economic impact, if any, of the New Jersey State Prevailing Wage Act. A secondary objective is to investigate the intent of the law. The following sections will sum up this researcher's efforts to meet the two objectives by first studying the prevailing wage law in greater detail. The next sections will review the research methodology and present findings based on primary data collected. Finally, the last section will sum up the research study with conclusions and recommendations.

Study of the Prevailing Wage Act

It is common practice for Federal and State governments to competitively bid construction projects and base contract award on the lowest bid price. This type of procurement system encourages contractors to competitively underbid each other to work. Because labor costs are a large percentage of construction costs, the idea of contractors cutting wage rates to obtain the lowest bid price is the reasoning behind the development of prevailing wage laws.

The original intention of prevailing wage laws was to determine the wage rates that "prevailed" for each trade in a particular community and set the required minimum rate to be paid all workers in that community equal to the prevailing rate. In this manor, it was believed that government contracts would be free from unfair wage competition among contractors bidding on government work.

A common misunderstanding among people outside the contracting business is that prevailing wage laws are the same thing as the Federal Minimum Wage Law. This is far from the truth. Take a Building Laborer as an example. This person works on a construction project for 2000 hours per year (forty hours per week, 50 weeks per year). If this worker was earning the minimum wage of $4.25 per hour his or her annual salary would be $8,500. In contrast, if this worker was paid the prevailing wage of$ 15.35 per hour, his or her annual salary would be $30,700 (Figure 2).

Nine states have never enacted prevailing wage laws. These states include: Georgia, Iowa, Mississippi, North Carolina, North Dakota, South Carolina, South Dakota, Vermont, and Virginia. In the past twelve years, nine states have repealed their prevailing wage acts (Figure 3).

The New Jersey State Prevailing Wage Act requires contractors to pay construction workers a predetermined hourly wage plus benefits for all contracts funded by the state and/ or local governments. These wages are determined by collective bargaining agreements of the individual trades and enforced by the New Jersey Department of Labor. Because Prevailing Wages are determined by collective bargaining agreements, they become equivalent to the union pay scale. The New Jersey law was enacted in 1913 to cover building and highway work on state or local contracts in excess of $2,000. The stated intent of the law is:

... to establish a prevailing wage level for workmen engaged in public works in order to safeguard their efficiency and general well being and to protect them as well as their employers from the effects of serious and unfair competition resulting from wage levels detrimental to efficiency and well-being.

Methodology of Research

This study of the New Jersey State Prevailing Wage Act started by conducting a literature search on prevailing wage legislation. This exploratory search found few references that apply to the New Jersey State Prevailing Wage Act or other state prevailing wage acts. Most of the references pertaining to prevailing wages were about the Davis-Bacon Act. A very useful source was a publication by Armand J. Thieblot Jr. Thieblot's book, entitled Prevailing Wage Legislation: The Davis-Bacon Act, State "Little Davis-Bacon" Acts, The Walsh‑Healey Act, and The Service Contract Act, was published in 1986 by the Industrial Research Unit of the Wharton School at the University of Pennsylvania. Perhaps the most convincing part of this book was the results of a survey conducted during the late spring and summer of 1974.

With the objective of estimating the cost of the Davis-Bacon Act, a detailed questionnaire was mailed to every other member of the Associated General Contractors, the Associated Builders and Contractors, the American Road Builders Association, the National Electrical Contractors Association, the Associated Independent Electrical Contractors, and the Mechanical Contractors Association. Approximately 10,000 questionnaires were mailed with just over 1,400 usable responses. Considering results of Thieblot's survey it was concluded that, in 1974, Federally funded construction projects cost approximately $2.1 billion more to construct because of the Davis-Bacon requirements.

To estimate the possible economic impact of the New Jersey State Prevailing Wage Act, this researcher developed a survey to determine any cost differential between prevailing and non-prevailing wage projects in the state of New Jersey during the year 1990. A complete copy of the survey, along with the cover letter, can be obtained from this researcher. The survey sample, totaling three hundred fifty-four, was mailed to every New Jersey contractor with membership to either the Associated General Contractors (AGC) or the Associated Builders and Contractors (ABC). This sample was chosen to simulate a representative sample of contractors and subcontractors in the state of New Jersey.

In addition to the possible wage differential cost, is the administration cost of the Act. Robert Venezia, the Chief of the Public Contracts Section of the Office of Wage and Hourly Compliance, was telephoned to investigate the administration cost of the New Jersey State Prevailing Wage Act. Another area of interest to this researcher was the municipalities of New Jersey. A 1991 Municipal Directory was obtained to learn more on the structure of the New Jersey State League of Municipalities. A second survey was developed and sent at random to municipalities with population of 25,000 people or less. The rationale behind choosing 25,000 people or less is that the majority of municipalities, 86 percent, have a population of less than 25,000 people. Only 14 percent of New Jersey municipalities have a population of 25,000 or more people. The

objective of this survey was to investigate the opinion of a sample of municipalities regarding the New Jersey State Prevailing Wage Act. The sample consisted of fifty municipalities randomly selected from the New Jersey State League of Municipalities 1991 Municipal Directory. Also, based on construction volume reported by these municipalities, an estimate could be made on any possible cost savings if municipalities with population under 25,000 people were exempt from the prevailing wage requirements.

Finally, all state Fiscal Offices with repealed prevailing wage acts were contacted to determine why their laws were repealed (Figure 3). Louisiana was the only state that responded with helpful information. William G. Black, the Senior Economist of the Legislative Fiscal Office for the State of Louisiana, provided a copy of the Fiscal Note Summary regarding the repeal of the Louisiana Prevailing Wage Act. A copy of this fiscal note can be obtained from this researcher.

Findings

The survey of all New Jersey members of the Associated General Contractors and Associated Builders and Contractors was conducted in December 1990 and January 1991.  The response rate was 17.51 percent with 354 surveys mailed and 62 usable surveys returned. Of the one hundred and six surveys sent to Associated General Contractor members, nine responded (eight percent) with completed surveys. On the other hand, of the two hundred forty-eight surveys sent to Associated Builders and Contractors members, fifty-three responded (twenty-one percent) with completed surveys. Therefore, the sample is comprised of fifteen percent Associated General Contractors members and eighty-five percent Associated Builders and Contractors members. Since the response rate was low for contractors belonging to the AGC, a follow-up survey was developed. A new cover letter, along with a copy of the original survey, was mailed to every other non-responding AOC contractor. None of these contractors responded to the follow-up survey.

The first question on the survey asked for the difference in pay for workers on prevailing and non-prevailing wage projects. Thirteen common trades were listed in the question. As seen in Figure 4, prevailing wages were an average of forty-seven and one half percentage higher than non-prevailing wages. The "non-prevailing wage" figures presented in column two of Figure 4 were average wages paid to workers on non-prevailing wage projects based on the survey responses. These were direct hourly wages without benefits. The "prevailing wage" figures presented in column 3 of Figure 4 were minimum wages paid to workers on state jobs as dictated by the New Jersey Department of Labor. These prevailing wages are wages paid without benefits. It should be noted here that the Department of Labor also has requirements on what benefit wages are to be paid to workers along with the regular pay rate. For the purpose of this study, when determining the wage differential, only the difference between wages paid without benefits was considered. This was because it was difficult to obtain accurate information on benefits paid to workers on non-prevailing wage projects. If a comparison was made, perhaps the wage differential cost would be even greater.

*      Figures in column two may be slightly inflated because some contractors included both wages and benefits for trades on the individual surveys.

**    Figures in column three are averages of all the New Jersey county prevailing wage rates during the same period of the survey.

Note: As a result of comparing surveyed non-prevailing wages (some worth benefits included) and actual prevailing wages (from the N.J. Department of Labor), the 47.50 percent increase may be a conservative estimate.

The second question of the survey asked for a breakdown of labor, material, equipment and other costs on a typical construction project. As seen in Figure 5, labor costs are an average eight percent higher on prevailing wage projects compared to non-prevailing wage projects.

Question number six of the survey asked to include any comments regarding the New Jersey State Prevailing Wage Act and its regulations. Forty-eight comments were received on the sixty-two returned surveys. Contractors overwhelmingly responded with an unfavorable attitude toward the prevailing wage act. Some highlights of the responses include:

Contractors surveyed were also asked to indicate their agreement or disagreement with seven statements regarding prevailing wage laws. The first four statements were arguments for such laws. When asked if the law attracted workers with more training or experience those surveyed disagreed. Contractors also disagreed with the statement that the law provides incentive for workers to improve their productivity and skill level. Also, contractors disagreed with the statement that the law provides incentive for managers to pay more attention to selecting, training, and managing their workers. Respondents strongly disagreed with the statement that the law reduces the need for first-line supervision.

The remaining three statements are arguments why prevailing wage laws cost state governments more money. Contractors strongly agreed that the law increases paperwork requirements. There was agreement that the law reduces crew productivity. Lastly, respondents strongly agreed that the law has an economic impact on the State of New Jersey.

The response rate for the survey to New Jersey municipalities was 44 percent with twenty-two of the fifty municipalities responding. Sixty-eight percent of the responding municipalities believe that the New Jersey Prevailing Wage Act has an economic impact on the state of New Jersey. Twenty‑three percent believe that it does not have an economic impact and nine percent were indifferent. Sixty-four percent of the municipalities surveyed believe that the elimination of the New Jersey Prevailing Wage Act would be a cost savings to their municipality. The survey of municipalities also found the average annual expenditure for construction in New Jersey municipalities was $175,750.

Conclusions and Recommendations

The primary objective of this research document was to determine the economic impact, if any, caused by the New Jersey State Prevailing Wage Act. To accomplish this, the percentage increase in job costs due to the Act was calculated. This was done by multiplying the average wage increase by the percentage labor to total job costs.

Take, for example, the cost of an average state prevailing wage contract to be $1,000,000. If the prevailing wage requirements were eliminated the cost savings would be approximately $140,893 as follows:

By using above formula, the value of state funded projects without prevailing wage requirements can be determined for 1990:

Now that the value of state funded projects without prevailing wage requirements have been calculated and the administration cost is known, the economic impact of the New Jersey State Prevailing Wage Act for 1990 was $276,096,120 as follows:

The secondary objective of this research document was to investigate the intent of the New Jersey State Prevailing Wage Act. Data from contractors surveyed indicates that the Act fails to meet its stated intentions. As for "protecting their (the workers) efficiency", those surveyed claimed that prevailing wage jobs are less productive and therefore less efficient. What the law really does is not protect against "unfair competition" but actually creates unfair market practices. It is apparent from those surveyed that union contractors support the prevailing wage law because it helps to create a monopoly and shut out open shop contractors from competing on state funded construction projects.

Based of the above conclusions, it is now apparent that the New Jersey State Prevailing Wage Act does have an economic impact on the state and the state government could reduce spending or support more construction and/or programs if it was repealed. Since 1979, there have been at least fifty-one bills introduced to repeal or substantially curtail existing prevailing wage laws. The reasons for these repeal effort was the estimated cost savings to state governments upon repeal. Louisiana, for example, repealed their prevailing wage law in 1988 because of an estimated annual cost saving of $22,500,000.

Falling short of repeal, a true "prevailing" wage rate for all trades should be determined. These wage rates could be determined by surveying a representative sample of all contractors and subcontractors in the state of New Jersey. The averages from these surveys would fall approximately halfway between union and open shop wages (assuming that 50 percent of state funded construction value in New Jersey is open shop and the other 50 percent is union shop) producing a savings of approximately half that of repeal. This would equate to approximately $138,048,060 ($276,096,120 Economic Impact/2).

Other reform recommendations would be to exempt municipalities smaller than 25,000 people from the prevailing wage requirements. This would produce a cost saving of approximately $11,811,487 as follows:

In conclusion, a cost saving in the range of $12,000,000 to $276,000,000 could be realized through reform or repeal of the New Jersey State Prevailing Wage Act.

Suggestions for Further Research

Recommendations for further research include investigation of some comments received in the surveys regarding the New Jersey State Prevailing Wage Act. Areas of investigation may include a comparison of quality of workmanship between prevailing wage and non-prevailing wage projects, a comparison of productivity levels between prevailing wage and non-prevailing wage projects and extra management time spent processing the added paperwork requirements on prevailing wage projects.

References

"The Davis-Bacon Act Should be Repealed." HRD-79-1 8; B-146842. April 27, 1979, Abstract.

1991 Municipal Directory, New Jersey State League of Municipalities, Trenton, N.J. Contractor associations urge reform of Davis-Bacon Act," The Air Conditioning, Heating and Refrigeration News, January 9, 1989, p. 1.

Erlich, Mark. "Labor Rises Up To Show The Way." The Nation, December 26, 1988, p. 716.

Fiscal Note H.B. 2 HLS 88-8, Legislative Fiscal Office, State of Louisiana, April 22, 1988.

Garden State Brickface Co. vs. New Jersey, N.J. District Court, No. 80-635, March 11, 1981.

Prevailing Wage Acts, New Jersey Stat. Ann. 34:11-56.2534:11-56.44.

Results from survey to random sample of the New Jersey League of Municipalities.

Robert Venezia, Chief of the Public Contracts Section of the Office of Wage and Hourly Compliance, Trenton, N.J. (personal communication, September 25, 1990)

Thieblot, Armand Jr. "The Davis-Bacon Act, State "Little Davis-Bacon Acts, The Walsh-Healey Act, and The Service Contract Act." Industrial Research Unit, The Wharton School, University of Pennsylvania, 1986, p. 14.

Value of New Jersey Public Construction Projects for 1990, F.W. Dodge, March 1991.

Wharton Industrial Research Unit Interview, New Jersey Department of Labor, Trenton, June 18, 1982.

William G. Black, Senior Economist of the Legislative Fiscal Office for the State of Louisiana, (personal communication, February 6, 1991)