Prevailing Wage, Productivity and Cost-Effectiveness

Prevailing wage advocates claim that by boosting construction wages, the law promotes a better-trained and more productive construction work force — the high-wage, high-skill argument. U.S. Census data suggests construction workers may be more productive in states with strong prevailing wage laws — but this does not mean that prevailing wage laws are cost-effective.

We compared states with strong prevailing wage laws to states without prevailing wage laws by using U.S. Census Bureau data to calculate value-added per construction worker and value-added per dollar of compensation. In 18 states without prevailing wage laws, the value-added per worker is $142,027, while the value-added per worker in 11 states with strong prevailing wage laws is $159,304, indicating that on a worker-for-worker basis, construction labor is 12.2 percent more productive in states with strong prevailing wage laws.[41]

It should be noted, however, that these "value added" calculations are likely to inflate the value of construction done by higher-wage workers. The Census Bureau defines value added as the "value of business done less costs for construction work contracted out to others and costs for materials, components, supplies, and fuels."[42] The "value of business done" calculation, in turn, is based on the sum of "receipts, billings, or sales."[43] Construction bids will include an allowance for labor costs, so these will be recaptured as part of a contractor’s receipts. The Census’ "value added" calculations do not, however, attempt to adjust for variations in labor costs, even though higher labor costs in and of themselves do not add to the functionality of a building. As a consequence, the value added on a construction project in a high-wage jurisdiction may appear to be higher than in a jurisdiction with relatively low construction wages. Because states with strong prevailing wage laws tend to have higher construction wages, the value added by workers in strong prevailing wage states may be somewhat inflated. With this in mind, it is possible that productivity per worker is not significantly higher in states with strong prevailing wage laws.

Furthermore, the same Census data indicates that payroll costs per construction worker are 19.2 percent higher in the strong prevailing wage states than in states with no prevailing wage laws. If one divides construction value-added by construction labor payroll, one finds that in strong prevailing wage states, each dollar paid for construction labor generates $4.27 in value-added, but in states without prevailing wage laws, a dollar of construction labor generates $4.54 in value-added. On a dollar-by-dollar basis, construction labor is 6.3 percent more productive in states without prevailing wage laws.

It should be noted that Michigan’s overall labor costs by this measurement are fairly good; the average dollar spent on labor yielded $5.02 value added. But there is little reason to credit the prevailing wage law with this — several states without prevailing wage laws do much better on this measurement. And as noted above, construction labor generally provides more value in states without prevailing wage laws.

This is roughly what one would expect to see when the cost of labor is boosted artificially: Employers make increased use of equipment or training to improve the productivity of their labor force, but there is no guarantee that employers will be able to completely offset the increased cost of labor. A government can command that wages be increased, but it cannot command that there be machinery or knowledge to make up for the higher wages.

And in the process of using training or equipment to improve labor productivity, employers may make do with less labor or refuse to hire untrained workers, reducing employment opportunities in construction. In 18 states without prevailing wage laws, construction workers made up 5.3 percent of the work force in 2004, compared with only 4.2 percent for strong prevailing wage states, an indication of the possibility that prevailing wage laws limit opportunities in the construction industry. In Michigan, construction employment made up only 3.7 percent of the employment in the state’s economy.[44]

In short, while individual workers may be more productive in states with strong prevailing wage laws, strong prevailing wage laws are also associated with higher payroll costs. The overall effect is to make construction labor more expensive, not less. This may be an attractive trade-off for construction workers (assuming they are able to find steady work), but it is a poor deal for business owners outside of the construction industry. Although the law does not apply to them directly, businesses seeking to build new facilities or expand existing facilities are likely to find it more expensive to do so in states with strong prevailing wage laws.