As detailed earlier, the exclusive use of union rates in setting prevailing wages results in wages that are 40 percent to 60 percent higher than the average found in the marketplace. Professor Richard Vedder’s analysis of construction costs using 1997 U.S. Census Bureau data revealed that depending on the type of construction, labor costs appear to make up 20 percent to 30 percent of the overall cost of construction. A similar analysis based on figures from the 2002 economic census showed little change: Depending on how nonconstruction workers (mainly office and administrative staff) are treated, payroll for construction workers appears to make up somewhere between 23 and 28 percent of the cost of construction nationally. Census figures for Michigan are similar.
Assuming that labor costs make up 25 percent of construction costs, the prevailing wage would add 10 percent to 15 percent to the overall cost of construction. As we will see in the next section, this estimate matches fairly closely with the experience of jurisdictions that have either added prevailing wage laws or granted exemptions from them.