This paper reports estimates of the effect of a state prevailing wage law on road construction costs per quality-adjusted mile and on the labor share of road construction from 2004 to 2019. We rely upon the Kessler and Katz argument for assuming exogeneity, noting that repeals were often judicial or randomly timed legislative actions. Our identification strategy is to use larger panel models employing the Kessler and Katz argument, and to use a two-way, fixed-effect panel model across three specifications.
In our panel model, we explicitly attempt to model recessions, trends and variation in overall federal road spending. In the two-way, fixed-effect models, we replace the explicit time modeling with year fixed effects.
We test cost and labor share on the presence of a state prevailing wage law, controlling for vehicle miles traveled and the federal share of road funding. These models all control for state fixed effects, spatial autocorrelation and common econometric concerns. Our three specifications treat differently time and the potential for network effects in bordering states. Our network effects are a first-order contiguity value of the dependent variable, designed to capture the potential cost or spending spillovers of construction projects that occur across state borders. Such items as state improvements to roads or highways or bridges connecting two states (such as connecting Indiana and Kentucky near Louisville) are what we attempt to model. We also included a dummy variable for the suspension of federal Davis-Bacon laws in four gulf states in the two months following Hurricane Katrina.
We then test four sample sizes, one of the conterminous states (with a Washington, D.C. exclusion due to concerns about road quality data), one with a $100,000 prevailing wage threshold, one with a $1,000,000 prevailing wage threshold, and one limited to the six states whose prevailing wage law changed during the sample period. We supplemented the labor share model with an estimate excluding Louisiana, which following Hurricane Katrina had labor share estimates over 100%. We also offer a six-state robustness check in our cost model, including only those states which changed prevailing wage laws during the sample period.
Across the board, the control variables in the cost model were as expected. Higher vehicle miles traveled increased costs, while a smaller share of federal roads increased state spending. The Hurricane Katrina suspension of Davis-Bacon had no effect, and the network effects were so small as to be irrelevant, though they were statistically significant to traditional levels. In our efforts to model time, we find little to compel the use of our model over a year fixed-effects specification.
These results offer some additional research questions, such as the role higher federal spending plays on costs of state projects, the role of federal share on state costs as evidence of distributional concerns with federal infrastructure spending, and the role vehicle miles traveled play on federal support. These all offer useful and interesting questions.
The major finding of our analysis of costs is that we have point estimates across several specifications that the presence of a prevailing wage law increases the cost per quality-adjusted mile of road construction by 8.9% to 14.3%.
Our estimates for labor share were less robust. We had data-measurement concerns due to uncertainty over the actual labor share, since we do not have data matching employment to road construction. As we discuss above, we believe most workers in heavy and civil engineering construction are employed in road construction, but the empirics surrounding that belief are sparse. Also, as we discuss in detail in our results section, the effect of prevailing wage laws on labor share is large, but it lacks consistent statistical significance. We interpret this as an absence of evidence that prevailing wage legislation alters the labor share of highway construction.
Finally, we note that these results follow from no restrictive assumptions regarding labor market structure. State prevailing wage laws exist to increase construction contract wages for affected employees above the market wage, regardless of structure. While we do not examine the wage issue directly, due to the challenges outlined above, we estimate two related questions. They are whether the presence of prevailing wage legislation increases construction costs for roads or changes the labor share of road construction. The answer to question one is yes: state prevailing wage laws increase road construction costs. The answer to question two is a tentative no. We find little evidence that prevailing wage legislation alters the labor share of road construction and maintenance.