Michigan lawmakers passed the state’s Prevailing Wage Act in 1965. The law mandated that workers hired on taxpayer-funded construction projects be paid the wages and fringe benefits which were prevailing in the locality where the project was to be built. This prevailing wage was tantamount to union-scale compensation because the law required wage rates to be based on the union contracts covering construction workers operating in the city, township or school district where the work was to be done.
The law covered a wide range of projects, including “new construction, alteration, repair, installation, painting, decorating, completion, demolition, conditioning, reconditioning, or improvement of public buildings, schools, works, bridges, highways, or roads.”[*] The purpose of the law is to artificially raise the cost of labor on government construction projects. This benefits unionized construction firms that can more easily compete for these bids. But prevailing wage also increases the costs to taxpayers of public construction.
The federal government similarly mandates prevailing wages on construction projects it funds through the Davis-Bacon Act of 1931. Many state construction projects involve both federal and state dollars, which complicates attempts to analyze the cost-benefit of these laws. According to a 2016 Congressional Budget Office report, however, repeal of the Davis-Bacon Act could have saved taxpayers some $13 billion between 2018 and 2026.[†]
The economic and fiscal impacts of Michigan’s prevailing wage law have long been of interest to Michigan policymakers and to scholars at the Mackinac Center for Public Policy. Indeed, the Mackinac Center has weighed in on the debate over prevailing wage mandates since 1990.[‡] This study represents our third major analysis of the impact of prevailing wage laws, with a specific focus on Michigan and the law’s impact on road construction and repair.
The Mackinac Center’s first study on prevailing wage involved a unique dataset created incidentally by a federal court decision. That ruling effectively suspended Michigan’s prevailing wage law from December 1994 to June 1997. The temporary change provided a natural experiment that Ohio University economist Richard Vedder used to measure the law’s economic impact for the 30 months before and the 30 months after its suspension.[§]
Vedder found that suspending Michigan’s prevailing wage law made possible at least 11,000 construction jobs that would not otherwise have been created. He also calculated a likely savings of 10% on public construction costs, equal to about $275 million, or 5% of the money generated by Michigan’s personal income tax in 1995. Vedder noted at the time that this 10-percent estimate “accords with several studies of the impact of prevailing wages on construction costs” and may “actually be conservative.”[**]
In 2007, then-Director of Labor Policy Paul Kersey authored the Mackinac Center’s second major prevailing wage study. He compared prevailing wage rates to nonunion wages in different regions in Michigan and estimated that the law increased the cost of construction projects by 10% to 15%. These additional costs are passed along to taxpayers. Measured in 2007 dollars, Kersey calculated that state taxpayers could have saved up to $250 million by repealing the state’s prevailing wage.[††]
In 2018, voter-initiated legislation that was passed by the Michigan Legislature repealed the state’s prevailing wage law.[‡‡] The change was short-lived, however, as the current Legislature voted to reinstate a prevailing wage law, which was signed by Gov. Whitmer on March 24.[§§] This study — the Mackinac Center’s third full study on the matter — suggests that doing so will significantly raise the cost of road construction for Michigan taxpayers.
In this report, Ball State University economist Michael Hicks examines the impact of prevailing wage laws across the country on the cost per quality-adjusted mile of road construction from 2004 to 2019. He also reviews the impact of these laws on the labor share of road construction costs. Hicks relies on data from the Federal Highway Administration, the Bureau of Economic Analysis and the Bureau of Transportation Statistics.
His research demonstrates that prevailing wage laws increase the cost of road construction by 8.5% to 14.3%, in line with previous Mackinac Center estimates and other scholarship. These results are both economically and statistically significant.
As the table below shows, Hicks finds that Michigan’s additional cost per quality-adjusted road mile ranged from a low of $5,932 to $9,205 due to the presence of a prevailing wage law. Other states that recently repealed their own prevailing wage laws were also demonstrably overpaying for road work.
That is not all. Hicks also examined labor’s share of road construction spending that flows to workers. When examining the proportion of highway spending that accrues to workers as income and benefits, he “found no compelling evidence that a prevailing wage law reduces the labor share of road construction.”
Hicks creates a two-way, fixed-effects model to control for many of the variables that impact the cost of road construction in states. He uses several specifications of the model to add confidence to the findings and tests the validity of the results. A full description of the model is provided in the full text of the study below.
The results of the modeling efforts confirm that prevailing wage laws raise the cost of road construction and maintenance. This suggests that Michigan lawmakers have made it more expensive to fix the state’s roads, impairing the goal of improving Michigan’s public infrastructure.
Prevailing wage laws are expensive and unfair. They force taxpayers to pay more than they otherwise would for construction projects like road construction. They harm taxpayers at the expense of a select group of unionized construction workers fortunate enough to land government-supported projects. In other words, these laws benefit a few at the expense of the many.
[*] “Prevailing Wages on State Projects: Act 166 of 1965” (State of Michigan, 2018), https://perma.cc/M7RT-7V85.
[†] “Options for Reducing the Deficit: 2017 to 2026” (Congressional Budget Office, Dec. 8, 2016), https://perma.cc/ 2393-XTTV.
[‡] George Leef, “Michigan’s Prevailing Wage Act: A Disaster for the Taxpayers” (Mackinac Center for Public Policy, March 5, 1990), https://perma.cc/2JWS-UFYE.
[§] Richard Vedder, “Michigan’s Prevailing Wage Law and Its Effects on Government Spending and Construction Employment” (Mackinac Center for Public Policy, 1999), 8, https://perma.cc/H8MT-FBDC.
[**] Richard Vedder, “Michigan’s Prevailing Wage Law and Its Effects on Government Spending and Construction Employment” (Mackinac Center for Public Policy, 1999), 11-15, https://perma.cc/H8MT-FBDC.
[††] Paul Kersey, “The Effects of Michigan’s Prevailing Wage Law” (Mackinac Center for Public Policy, 2007), https://perma.cc/ SY2L-94XX.
[‡‡] “Initiation of Legislation" (State of Michigan, 2018), https://perma.cc/Y34R-YJ65.
[§§] “2023 Michigan Public Acts Table” (Michigan Legislative Service Bureau, March 27, 2023), https://perma.cc/JL85-KX6R.