Michigan's Prevailing Wage Act: A Disaster for the Taxpayers

Special interest legislation--laws which benefit a small number of well organized people at the expense of the general public--are an inevitable feature of democratic government. The explanation for this is simple. The special interest group knows about the legislation (in fact, it usually initiates it) and will work hard and spend considerable money to ensure its passage. However, very few people outside of the special interest group know about the existence of special interest bills and, thus, register no opposition. Politics is skewed in favor of measures which enrich a few at the expense of many.

One notorious example of this phenomenon is the federal Davis-Bacon Act of 1931, which requires that the "prevailing wage" be paid to workers on all federal construction projects. Construction workers must be paid what the Department of Labor decides is the "prevailing wage" for each type of work done. This prevailing wage is determined by taking a survey of wages paid for a type of work in an area, and finding the average. This eliminates competition in labor costs, and often shuts out lower-wage, non-union contractors from government construction work. Construction workers on such projects earn more than if the law permitted competition; therefore, the taxpayers wind up paying more for the project than they otherwise would.

Michigan passed its own Prevailing Wage Act in 1965 providing that the "prevailing wage" must be paid to construction workers on all state projects. The Act's coverage was extended in 1978 to compel payment of the prevailing wage on all school construction receiving financial assistance from the state's Economic Development Corporation. Special interest legislation pure and simple: a few gain at the expense of many.

It is bad enough that we have to put up with the Davis-Bacon Act, which inflates the costs of everything the federal government builds. But Michigan's Prevailing Wage Act is even worse. While the U.S. Department of Labor at least bases the prevailing wage on a survey of wage rates in the area, Michigan looks only at the union wage rate. If there is no union contract in a locality where there is to be a state construction project, the prevailing wage is then taken to be the union wage rate in the nearest locality, even if it is in another state!

The result is that labor costs on all state construction projects are highly inflated. One study done to compare how much the state actually paid for construction labor versus how much it would have paid had there been open competition concluded that the differential is 22 percent.

The tendency of special interest legislation is for it to be extended as far as possible. After its initial success, the special interest group will lobby its political allies to enlarge the scope of its benefit. For example, the prevailing wage requirement has been extended to privately built construction which is to be leased to the state. Despite an Attorney General's Opinion stating that the Prevailing Wage Act does not apply to such projects, the state's Department of Labor has been insisting on it anyway. How? The Department of Management and Budget (DMB), without any clear statutory authority to do so, has been making the payment of the prevailing wage a term of contracts it makes with private builders.

Another expansion of the Prevailing Wage Act has been to federal construction within Michigan For example, a construction project was to be done at Camp Grayling in 1987. Since this is a federal defense project, the Davis-Bacon Act should apply. However, as the bidding was actually handled through the state government, the Department of Labor stepped in and applied Michigan's law. Evidently, even the slightest involvement of the state is a sufficient pretext to trigger the Prevailing Wage Act with its added costs.

Yet another extension of the Act is the Department of Labor's setting and enforcing of apprentice ratios on state contracts. The law says nothing about apprentice to experienced ("journeyman") ratios, but, nevertheless, the Department says that contractors must have at least a certain ratio on all state projects. The effect is once again to raise costs, since apprentices earn less than do journeymen. The state is helping to provide more employment opportunity for the better-paid workers while reducing it for the lower-paid.

The Prevailing Wage Act is bad law and bad economics. Repealing it would appear to be a good idea whose time is long overdue.