From our estimates of labor costs and the experience of Michigan and other jurisdictions, it seems reasonable to conclude that Michigan’s prevailing wage law, by mandating union wage rates on all public construction, adds 10 percent to 15 percent to the cost of all public construction. Because state and local governments spend billions of dollars annually on construction, this imposes a heavy burden on the state’s taxpayers.
In fiscal 2002,* Michigan state government spent more than $1.44 billion on construction, while public schools spent $1.32 billion, and local governments spent approximately $2.6 billion. Some of this construction was covered by the federal Davis-Bacon Act. The Davis-Bacon Act itself mandates the payment of prevailing wages on any project where the federal government provides more than $2,000, and although the act does not explicitly mandate union scale, there is anecdotal evidence of some bias in that direction. For the sake of simplification, this paper will assume that where the Davis-Bacon Act applies, the potential savings for the state and local governments would be negligible if Michigan’s prevailing wage law were repealed.
The Davis-Bacon Act has had the heaviest impact in road construction. In 2002, Michigan’s state and local governments received $661 million in highway funding from the federal government. The state of Michigan has customarily passed a quarter of federal roads funding on to local governments. This proportion would leave $496 million of state-managed road construction subject to the federal Davis-Bacon Act.
State departments of transportation have some flexibility in how federal highway funds are used. While it is possible for federal funds to be spread out over many projects, making all of those projects subject to the Davis-Bacon Act, it is also generally possible to concentrate them into several projects, leaving the remaining state road projects free from Davis-Bacon mandates. Consequently, of the $1.44 billion in state government construction spending in 2002, only the $496 million in federal highway funds received by state government would have been covered by Davis-Bacon laws. The remaining $945 million in state construction spending, both highway and nonhighway, would have involved minimal federal money, leaving state government free to apply its own wage policy. If we assume that the state prevailing wage law increased construction costs by 10 percent — a conservative assumption — the state would have saved approximately $86 million in state construction spending in 2002.†
The state also transferred $1.08 billion to local governments for road construction and maintenance in 2002. While exact figures for highway construction by local governments are not available, we do know that overall capital outlay (a category that includes both construction and related expenses, such as land acquisition) made up around 43 percent of highway spending in Michigan in 2002. Assuming that same ratio applied on these transferred funds would give us $464 million that was used for capital outlay. From this one could reasonably estimate that around half, $232 million, was spent on road construction that was not subject to the federal Davis-Bacon Act.** This in turn leads to an additional $21 million in likely savings on highway construction and maintenance if the state prevailing wage law had not been in effect.
Public school districts across the state spent $1.32 billion on construction in 2002. Because the state acts as a surety on most of the bonds used for public school construction in Michigan, the overwhelming majority of this construction is covered by the state prevailing wage law. We estimate that 90 percent of school construction is affected by the prevailing wage law, or approximately $1.2 billion in 2002.‡ Thus, in the absence of the prevailing wage law in 2002, school districts would have spent $109 million less.
Given the three estimates above, it is reasonable to project that repeal of the state’s prevailing wage law would have saved $216 million in 2002. (An estimate of the possible savings for county and municipal governments with the repeal of the state prevailing wage law on projects that are partly funded by the state is beyond the scope of this report.)
In addition, many of Michigan’s largest local governments, such as Detroit, Ann Arbor and Lansing, have prevailing wage statutes of their own. While there appear to be no county prevailing wage laws on the book, there are at least nine municipal prevailing wage laws in Michigan, covering cities with approximately 15 percent of the state’s population.*** In 2002 Michigan municipalities spent another $1.2 billion on construction projects other than roads (road spending was discussed earlier), and if we assume that municipalities’ construction spending roughly mirrored their share of the population, these nine municipal governments would have spent approximately $180 million. By our earlier estimate, these communities could have spent $16 million less on the same construction if they had not enacted prevailing wage ordinances, or if the Michigan Legislature had precluded local governments from enforcing prevailing wages.
Overall, we estimate that in 2002 alone, Michigan taxpayers would have saved $232 million on construction spending by school districts and by state and municipal governments in the absence of state and municipal prevailing wage laws. This is a fairly cautious estimate, based on a relatively modest assumption of the cost of Michigan’s prevailing wage law on average construction costs. An equivalent amount in 2007 dollars would be $269 million.††
* The year 2002 is the most recent for which U.S. Census data on state and local construction spending are available.
† Our assumption that the prevailing wage law adds 10 percent to the cost of construction implies that repeal would result in a savings of 9.09 percent.
** John C. Taylor, an associate professor of marketing and logistics at Grand Valley State Univeristy, made a similar assumption in making his own estimate of the possible savings from state prevailing wage law repeal. See John C. Taylor, Road Funding, Time for a Change (Midland, Mich.: Mackinac Center for Public Policy, 2007), 74. Taylor used a different base year (2004) and made slightly different assumptions on the effect of the prevailing wage law, to come up with an estimate of $25 million in likely savings.
‡ According to municipal funding expert Lou Schimmel, “nearly all” of school construction is at least partially funded by qualified bonds. Mike Alandt, director of the Municipal Advisory Council of Michigan, puts that figure at 80 percent to 90 percent. Lou Schimmel, telephone interview, March 9, 2007; Mike Alandt, telephone interview, March 16, 2007.
*** Those municipalities are Detroit, Warren, Lansing, Ann Arbor, Livonia, Battle Creek, Bay City, Kalamazoo and Saginaw. For population figures, see US Census Bureau "Quick Facts" available online at http://quickfacts.census.gov/qfd/states/26000.html.
†† This figure was calculated using the consumer price index to adjust for inflation.