There are four theoretical arguments against prevailing wage laws. First, such laws force employers to pay compensation levels in excess of what workers might voluntarily agree to accept. The quantity demanded of construction labor varies inversely with its price—i.e., the cheaper labor is, the more workers employers will want to hire. This is the famous Law of Demand (see Graph 1). Conversely, the quantity of labor supplied tends to vary directly with its price (or wage): The more workers can earn in construction, the more persons will want to work those jobs. In a market without any legal impediments, wages will tend to be set at a level where the quantity demanded equals the quantity supplied. At that point, all workers truly seeking jobs and capable of doing the work are able to obtain employment. Economists refer to this point as "market equilibrium."

The enactment of a prevailing wage law forces wages up (to B in Figure 1), to a point where the quantity of labor supplied (S) exceeds the quantity of labor demanded (D). Put simply, prevailing wage laws create unemployment and reduce employment opportunities in the affected fields. The precise impact depends on a variety of factors, including the sensitivity of workers and employers to changing wages, as well as the extent to which prevailing wage laws apply in labor markets.

Second, where employers show discriminatory treatment toward workers on the account of their race, sex, age, or some other attribute, prevailing wage laws make it easier and less financially punishing for them to indulge their particular bigotry. Consider a state without a prevailing wage statute, where Contractor A wants to hire a plumber. He offers the generally agreed-upon, market hourly wage of $10 per hour and receives one job applicant, an African-American. Even if Contractor A possesses some racial prejudice, he almost certainly will hire the black applicant because he needs a plumber. To get more applicants in the hopes of attracting a preferred white worker, he would have to offer to pay more, thus lowering his profits. Now suppose a prevailing wage law sets plumber wages at an above-market rate of, say, $15 per hour. Contractor A gets three applicants, two white and one black. He can now hire a white worker without a financial penalty. In other words, prevailing wage laws remove the financial disincentive for employers to engage in racial discrimination since all workers must be paid according to the same wage rate.

Third, prevailing wages—being higher than wages normally agreed upon between employers and workers—should lead either to higher prices for contracted goods and services or to less of the goods being provided. For example, suppose it costs $5 million to build on average one mile of highway when contractors pay voluntary market wages, but $5.5 million when they pay government-mandated prevailing wages. Suppose further that a state highway department has a budget of $300 million for new highways. Without prevailing wages, 60 miles of road can be built; but with such wages, only 54 miles can be constructed. Thus prevailing wage laws tend to reduce real infrastructure investments. It is true that the state could spend $330 million so that no real reduction in highway construction need occur, but in that case the taxpayers are burdened more, through higher taxes and/or a reduction in other state budget priorities.

A fourth theoretical objection to prevailing wage laws relates to administrative issues. Nationwide, there are literally thousands of distinct local labor markets, and numerous occupations that come under the jurisdiction of the federal Davis-Bacon Act as well as state laws such as exist in Michigan. Moreover, wages change with some regularity. Thus there are literally tens of thousands of different wages that need to be evaluated to guarantee they meet the "prevailing wage" criteria, and this evaluation needs to be done on at least an annual basis to ensure accuracy. The complexity of such evaluation can drive administrative costs way up and open the door for fraud and abuse.3