TO: Ms. Hazel M. Bell, U.S. Department of Labor

FROM: Paul Kersey, Director of Labor Policy

DATE: Sept. 18, 2007

SUBJECT: Determination of Prevailing Wages under the Davis-Bacon Act

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On July 30, 2007, the U.S. Department of Labor requested public comments on the collection of data used to determine prevailing wage rates in the construction industry. We are pleased to submit the following comments for your consideration.

The Mackinac Center for Public Policy is an independent, nonprofit, nonpartisan research and educational institute devoted to analyzing Michigan public policy issues. Among other areas, the Center focuses on protecting and reporting upon worker labor rights and improving the quality and cost-effectiveness of government services.

We have recently released a major study on the effects of Michigan’s prevailing wage law, www.mackinac.org/8907, in which we found that the law increased the cost of government-financed construction by 10 to 15 percent, adding $250 million to the cost of government without any measurable improvement in quality and mixed evidence of improvement in productivity. We found that the law disproportionately benefited high-wage workers; workers in Michigan’s construction industry typically earned wages 28.1 percent higher than those of Michigan’s workforce as a whole, but the prevailing wage law increased those wages from 40 to 60 percent on state-financed construction. And finally we found that strict prevailing wage laws like Michigan’s were associated with a lower percentage of a state’s workforce engaged in construction, indicating that prevailing wage laws restricted opportunities for job-seekers in the construction field.

Michigan’s prevailing wage law is unusually severe in that it explicitly calls for the exclusive use of collectively bargained wages in setting the wage scales for public construction. While wages on government contracts should generally be set by the market, as they are on nearly all private projects, the federal law has the advantage of calling upon the Department of Labor to look at the entire market, not just unionized firms, in making prevailing wage determinations. As long as this review of the whole construction labor market is done thoroughly and accurately, many of the unnecessary costs and other harmful effects of the prevailing wage law will be minimized. While we question the wisdom of prevailing wage laws, DOL must enforce the law as it is written. Our report will discuss measures that the Department of Labor’s Wage and Hour division can take to minimize the costs of Davis-Bacon enforcement while respecting both the letter and spirit of the law.

We would begin by observing that as a general rule it is the government and taxpayers, not construction workers, which bears the greater risk if prevailing wage determinations are inaccurate. If the prevailing wage determination understates the wage that a particular construction worker would receive in the free market, that worker is not obligated to accept that lower wage; he or she is free to insist on his or her customary wages. If the contractor refuses to pay that higher wage, the worker should be able to find work at the true prevailing wage elsewhere. But if the prevailing wage estimate overstates the actual prevailing wage, contractors will be obligated to pay that higher wage until the error is corrected, and the additional cost will most likely be passed on to the government, and ultimately taxpayers, in the form of higher bids on public construction.

It is critical that the government receive a representative sample of wages paid when it updates its prevailing wage determinations, and that it use that information carefully to arrive at the correct rate.

The current practice of the Wage and Hour Division of the Department of Labor is to solicit information from "contractors, contractors’ associations, labor organizations, public officials, and other interested parties." This practice invites multiple reports, and in particular increases the risk that union rates will be over-represented in the sample because both unions and unionized employers have the possibility of submitting wage data. Surveys should be sent out to and accepted from employers only. Such a rule will provide for a more balanced sample of both union and non-union workers, returned from those who have direct access to records of wages and hours worked.

With representative data in hand, the Wage and Hour Division must have a simple set of rules, scrupulously observed, to calculate a prevailing wage. The current regulations state then when a majority of workers in a given area and classification receive a given wage, that wage will be treated as prevailing. Otherwise, a weighted average is used. This is a reasonable rule under the circumstances, but Prof. Armand Thieblot has found considerable evidence that survey results have been manipulated in order to generate union "majority" wages where in fact there is no single wage covering a majority of workers. Wage and Hour Division should make every effort to ensure that the rules are applied consistently so that prevailing wage determinations reflect the data.

But while the survey process itself is important, there are other questions that DOL should pay closer attention to before the surveys go out: the questions of geographic coverage and of worker classifications. In other words, how should a state be broken down geographically for the purposes of prevailing wages, and how should the construction workforce be broken down occupationally?

The Davis-Bacon Act states that:

The minimum wages shall be based on the wages the Secretary of Labor determines to be prevailing for the corresponding classes of laborers and mechanics employed on projects of a character similar to the contract work in the civil subdivision of the State in which the work is to be performed, or in the District of Columbia if the work is to be performed there.

In our report on Michigan’s prevailing wage law we suggested that the use of counties as the geographic units for prevailing wage determinations was obsolete, and that the state would be better served with a smaller number of geographical districts, or even a single statewide prevailing wage schedule. The statutory language listed here, especially the reference to "civil subdivision," indicates that DOL’s task might be complicated if it were to seek to simplify the Davis-Bacon wage setting process by dividing states up into fewer districts, however we would urge DOL to explore this option. Communications and transportation have improved greatly since the passage of the Davis-Bacon Act, leading to much greater economic integration. As we observed in our Michigan prevailing wage report:

In an age when markets for goods and services are increasingly global, it would seem more than reasonable to think of the Detroit area, for example, as a single construction marketplace with fairly consistent wages, as opposed to the current practice of issuing separate wage determinations for Oakland, Macomb, Washtenaw, Livingston, Monroe and Wayne Counties.

Detroit is certainly not the only city where this sort of thing could be said. Using larger geographic areas for the setting of prevailing wages would also lead to larger sample sizes, increasing the likelihood that a given prevailing wage determination will be accurate.

Another issue that deserves more consideration is the way in which the construction workforce itself is broken up into work classifications. The current DOL process can result in wildly different sets of classifications being used. The most recent wage determination for Wayne County, Michigan (which includes the city of Detroit) has more than 120 different classifications, while the most recent wage determinations for Fulton County, Georgia has only 32.

The shifting categories make compliance needlessly difficult for contractors and complicates enforcement for DOL as well. Finally, the looseness of work categories creates opportunity for the manipulation of survey responses in favor of union rates. In order to rectify these problems, DOL should follow the example of the State of Tennessee and develop one single, nationwide set of work classifications.

Prevailing Wage laws like the Davis-Bacon Act can be difficult to comply with, complicated to administer, and if administered poorly can be expensive for taxpayers as well. However, much of the unnecessary cost of Prevailing Wage laws can be avoided by developing a consistent, fair methodology for determining prevailing wage rates and following that process scrupulously.

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Paul Kersey is director of labor policy for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

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