Prevailing wages raise labor costs. The impact that they have on total construction costs depends on three factors:

In fiscal year 1995, the state of Michigan and its localities could have saved about $251 million by eliminating prevailing wage provisions.

1) the extent to which prevailing wages exceed the wages that employers and workers would otherwise voluntarily agree upon;

2) the proportion of labor costs in the total costs of construction; and

3) the impact, if any, that prevailing wages have on worker productivity.

Turning first to the issue of the extent that prevailing wages exceed the wages that employers and workers would otherwise voluntarily agree upon, the evidence is that prevailing wages are very well over 50 percent above market wages—for example, $16 per hour vs. $10 per hour. To be sure, some workers might be hired at union-scale wages in the absence of prevailing wage laws, and other workers (e.g., supervisors) are not affected by the laws, so the aggregate impact on payroll may be less, but it is still significant.

This generalization applies in Michigan. Tables 2 and 3 show that, for two populous Detroit-area counties, prevailing wages for many construction occupations tended to be substantially above the wages voluntarily negotiated between employers and workers.

On average, it appears that labor costs equal 20 to 30 percent of total construction contracts, with the proportion somewhat lower for single family housing.10 If labor costs were 25 percent of the total value of a construction contract, and if on average labor costs per hour were increased 40 percent by prevailing wage laws, this would drive up total construction costs by about 10 percent—assuming that paying prevailing wages does not change the physical productivity of workers. (There is no reliable evidence that labor productivity is materially different where prevailing wages exist, a point considered below.) The 10-percent figure accords with several studies of the impact of prevailing wages on construction costs. It may actually be conservative, since the 40-percent compensation differential assumed may well be below the average for prevailing wage contracts.

During the 30-month period of no prevailing wages in Michigan, there is evidence of numerous government construction projects being carried out with significant savings arising from the use of non-union scale labor. For example, in the Hastings school district in Calhoun County, the lowest open shop (non-union) bid was $4,343,000—almost 13 percent below the lowest union bid of $4,969,000.11

There are also examples of even greater savings associated with non-union labor. In Saginaw County, a Carrollton public school renovation project received a non-union bid of $645,000, which was more than 16 percent below the lowest union bid of $774,000. To be sure, in some cases the savings from the use of non-prevailing wage labor were less, but they were always real and positive. On average, over 20 different projects, the savings were well above the 10-percent figure used in some calculations of taxpayer burden below.

Assuming the 10-percent differential and that the "construction cost" portion of capital outlays by Michigan state and local governments equals the outlays for activities subject to prevailing wages, in fiscal year 1995, the state of Michigan and its localities could have saved about $251 million by eliminating prevailing wage provisions, since construction outlays for Michigan governments in fiscal year 1995 were $2,509,684,000. Alternatively, some $251 million more in social infrastructure could have been completed.12

Presumably, some non-construction capital outlays were also subjected to prevailing wages, such as renovation work considered as heavy maintenance (e.g., replacing a roof on a school building). If one were to assume that 20 percent of the non-construction capital outlays were subject to prevailing wages and that the average savings of eliminating prevailing wages were 10 percent, the savings to taxpayers for the public projects undertaken in Michigan in 1995 would be about $275 million.

A savings of $275 million is no small sum of money: It is the equivalent of slightly over five percent of the revenue raised by the Michigan individual income tax in fiscal year 1995 ($5.473 billion). Assuming things have not changed dramatically since 1995, repealing Michigan's prevailing wage law would have an impact the equivalent of giving every taxpayer a rebate equal to five percent of his state income tax payments. The continued existence of prevailing wage laws therefore has a potentially real and important impact on the well being of the residents of Michigan.

The calculations above are extremely cautious and conservative. A majority of the government construction projects examined by this author showed potential savings of greater than 10 percent associated with the elimination of prevailing wages. The year examined, fiscal year 1995, was one in which the prevailing wage law was invalidated for part of the year, so some work may have already been undertaken outside the prevailing wage environment (if all work had been under prevailing wages, construction outlays may have been higher).

National data on construction costs reinforces the notion that the 10-percent savings estimate is probably extremely conservative. Chart 4 shows that construction costs per square foot for projects generally undertaken in the public sector (e.g., school buildings, general public buildings) tend to be dramatically higher than those undertaken in the private sector (e.g., commercial or manufacturing buildings).

The added expense that prevailing wages impose upon school construction projects frustrates officials in many Michigan school districts because it may make it more difficult for them to gain approval of important bond issues from skeptical taxpayers. Statewide in 1998, only 44 out of 107 proposed school bond proposals worth $2.2 billion were approved by voters.13 James Kos, superintendent of Hamilton Public Schools in Allegan County, argues that a repeal of the prevailing wage law could save his district "between one and $1.5 million in construction costs and we' d be able to use that money for students."14

Some will argue, however, that prevailing wages improve worker morale and provide a more skilled labor force and raising productivity, in keeping with a concept called "efficiency wages" that is much discussed by some modern "new" Keynesian economists.15 To get some sense of the productivity of construction workers, state government data on construction workers were gathered from the U. S. Department of Labor and data on the value of construction contracts were gathered from the U. S. Department of Commerce. The average productivity of workers in the "no prevailing wage" and "strong prevailing wage" states was then compared by dividing the value of construction contracts in 1997 by the number of construction workers.

As Chart 5 indicates, output per construction worker was actually about four percent higher in the states without prevailing wages, suggesting that the existence of such laws may lead to inefficiencies and reduced productivity, enhancing our confidence in stating that prevailing wage laws materially raise the costs to taxpayers. If anything, these data suggest that the savings from eliminating prevailing wages may be materially greater than the 10 percent figured used in the calculations above. For that reason, the author believes that a 5 percent reduction in the Michigan individual income tax could easily be financed from the savings from elimination of the Michigan prevailing wage law.16