What Is Prevailing Wage & Everything You Should Know About It

Any employer hoping to secure a government contract, whether they want to work for a town, state, or federal authority, has to pay its workers the prevailing wage for that area. Here’s what that means, and why you should care.

What Is Prevailing Wage?

Prevailing wages are set by the government, but they’re not arbitrary, and it’s not really a strategy to keep the cost of work down.

Using surveys (generally taken on a yearly basis) and the results of collective bargaining agreements (union contracts), each county will come up with an average wage for types of workers in the region. States will, too. In each area, electricians will have their own “prevailing wage,” as will mechanics, and all of these wages will be published and publicly available.

Put a bid in on a government project and you have to promise to pay your workers the prevailing wage or you don’t have a chance of getting the contract. In this way, a minimum wage is established for each type of worker.

What Are Prevailing Wage Rates For?

The initial idea behind prevailing wage laws, says Ross Eisenbrey, an expert at the Economic Policy Institute, was to protect local labor markets which were being threatened by contractors from elsewhere.

Electricians from Topeka could undercut the bid on a project in Wichita because they were paying their workers far less than electricians in Wichita made. After finishing the work in Wichita, the Topeka electricians could simply move on, while Wichita’s electricians lost out on the work in their own hometown. That was a problem since families were losing out on the opportunity of sustaining themselves through local government work.

In 1891, Kansas passed the first prevailing wage law. By the end of the Great Depression, 28 states had laws mandating the creation of prevailing wages. Today, only 18 states don’t set prevailing wages:

What Is A Prevailing Wage Job?

Most types of employment that could be considered construction are bound by prevailing wage rates, at least when it comes to public works projects. Repair work is covered, too, as is demolition, remodeling, renovation, and utilities work.

No matter the state, any federal project (including “state” projects funded through federal grants) is ruled by the Davis-Bacon Act, a law passed in 1931 that applies to “contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works.”

Speaking with the International Business Times in March 2015, Eisenbrey noted the importance of setting a “floor,” lower than which wages couldn’t drop. If you didn’t set a floor, each contractor could bid lower and lower and lower, ultimately hurting the job’s quality and potentially exploiting laborers in need of the work.

Having a prevailing wage takes how much you pay workers (and, since benefits are often included, how well you treat them) out of the equation. Contractors have to compete on the quality of their work, how quickly they can get the job done and how efficient their workers are, rather than on pricing alone.

Prevailing wage laws stand to preserve (often explicitly) the work unions have done in negotiating higher wages for employees. Since collective bargaining agreements are often taken into account when determining the prevailing wage, it’s usually comparable to what union workers make. That means union shops can usually compete on government projects, rather than losing out to contractors who pay their workers less than the union rate.

How Is Prevailing Wage Calculated?

Prevailing wages are meant to reflect, not determine, the current economic situation of a community. Instead of imposing an arbitrary wage on that community, government authorities will look at what people are already making there, and then set the prevailing wage accordingly.

For federal projects, people from the Department of Labor will gather together statistics on what workers in a specific region are making for work similar to the proposed public project. If more than 50% of the relevant workers are making a certain wage, that’s the prevailing wage, and will become the legal “floor” for contractors bidding on the project. If there isn’t an exact wage that a majority of workers are making, the government will take an average of the wages being paid.

States, on the other hand, use a variety of formulas to come up with prevailing wages. Some take an average of local wages, while others base their prevailing wages on union-bargained contracts.

Prevailing wages usually include benefits and overtime pay, not just a straight hourly wage.

Who’s Against Prevailing Wages?

Conservatives, usually, although it wasn’t always that way. In fact, the Bacon-Davis Act, which set prevailing wages for federal projects, was sponsored by 2 Republican senators and passed into law by Herbert Hoover, an (arguably) conservative President.

Today, Republican senators are rallying around anti-prevailing wage measures, much as they’re committed to busting unions through right-to-work laws. Conservatives like Indiana’s state representative Jerry Torr think prevailing wage requirements stand in the way of free-market dynamics, which would drive down costs across the board and save taxpayers’ money.

Critics of that approach disagree, saying prevailing wage laws force contractors to compete on quality and productivity, which saves money in the long run because the work is good. Productivity also increases, they say, because higher wages attract more experienced workers as a matter of course. Prevailing wages also promote safer workplace standards, which keeps money in employers’ pockets since fewer workers file accident lawsuits.

Does Prevailing Wage Raise The Cost Of Public Work?

Like many legal arguments, the dispute over prevailing wage laws doesn’t seem well-rooted in fact. Numerous studies have looked into this question, of whether prevailing wages drastically increase the cost of public projects, and by and large, the answer has been clear: no, they don’t.

But before we get to any studies, note that labor doesn’t account for most of a construction project’s cost. Even if prevailing wage laws do force wages to rise, that increase doesn’t have much effect on the total cost of a project. On average, 25% of a project’s cost will go to laborers, including payroll taxes (which necessarily increase the more you pay your workers) and benefits. Increasing those wages by as much as 10%, according to the Economic Policy Institute‘s Nooshin Mahalia, would only increase the total of a contract by around 2.5%, basically negligible in Mahalia’s mind.

From the outset, then, it looks like controlling wages up or down won’t affect the cost of public work to governments by all that much. Now let’s get into the research.

Prevailing Wage Case Study

Comparing the costs of school construction in all 50 states, researchers from the State University of New York system and the University of Utah found that prevailing wage laws didn’t affect construction costs in a meaningful way. Their results, published in a 2003 edition of Industrial Relations, flew in the face of then-wide spread arguments that repealing the laws would decrease the burden of building new schools for taxpayers.

Importantly, the researchers controlled for the business cycle, since construction is a “boom and bust” industry, cycling through periods of more or less activity. Instead of prevailing wage laws, decreases in cost were linked to economies of scale. For example, doubling the size of a construction project increased the job’s total cost by only 93%, rather than the 100% one would expect all else being equal.

Public schools cost over 15% more than private schools to build, but that was true independent of whether prevailing wage laws were present in the state under consideration.

3 Case Studies In Repeal

There’s even some evidence that repealing a prevailing wage law hurts a state’s economy more than it helps. Two researchers, one from Michigan State and one from Rutgers, took a look at 9 states that had repealed their own “little Davis-Bacon” laws during the 1980s. They found that losing the prevailing wage led to a decrease in wages for all construction workers (in Wisconsin, the state’s 100,000 construction workers would lose an estimated $123 million in income every year), as well as a significant “ripple effect” because those workers would be spending less money at other businesses.

For the full PDF of this study, click here.

State tax revenues get hit hard, too, so hard that any savings in cost associated with lower construction bids are overshadowed by the losses in revenue. Occupational injuries increase, leading to higher workers comp insurance costs. States without prevailing wage laws tend to rely heavily on low-skill workers, since their cheaper, increasing maintenance costs over the long-term.

Those results were confirmed by a different study, “Losing Ground: Lessons from the Repeal of Nine ‘Little Davis-Bacon’ Acts,” which found that the societal impact of repealing the laws created a burden for communities, by cutting worker income, increasing insurance costs, and decreasing government tax revenue.

Looking specifically at the repeal of Kansas’ prevailing wage law, which occurred in 1987, Peter Philips found that, beyond not saving the state any money, losing its prevailing wage unequivocally hurt Kansas’ workers. Here are Philips’ major conclusions:

• construction worker wages fell 10% after Kansas repealed its law, across all construction projects, not just public ones
• employers spent 17% less on pension and health insurance contributions
• apprenticeship training decreased by 38%, but hit minority workers particularly hard, with a drop of around 54%
• rates of serious injury in the construction industry increased by 21%

But the proposed savings that dropping the prevailing wage would net for Kansas governments, estimated between 6 and 17% before the law was nixed, “failed to materialize,” Philips writes. The cost of construction on public schools in Kansas remained “virtually identical” to the costs in neighboring states, even ones that kept their prevailing wage laws.

Is Prevailing Wage Less Expensive?

That is the counter-intuitive result of an earlier Philips study, “Square Foot Construction Costs for Newly Constructed State and Local Schools, Offices, and Warehouses in Nine Southwestern and Intermountain States.” Philips, a Stanford-educated economics professor at the University of Utah, looked at construction projects in 5 states with prevailing wage laws (New Mexico, Texas, Oklahoma, Wyoming, and Nevada) and 4 states without the laws (Arizona, Utah, Idaho, and Colorado).

In the states with prevailing wage laws, public elementary schools cost $6 less, per square foot, than schools in states without laws. Middle and high schools cost even less, an average savings of $11 per square foot. Warehouses cost $35 less per square foot. Only office buildings cost more in prevailing wage states, an average rise of $2 per square foot.

Philips even removed Texas, by far the largest spender on government construction projects, from his study, but the savings to prevailing wage states still showed up. His conclusion? Prevailing wage laws help motivate more aggressive collective bargaining. In conjunction with a heightened emphasis on apprenticeship programs, generally a priority for unions, the level playing field prevailing wage laws create for union contractors radically increases worker productivity, and thus cost savings for local and state governments.

An earlier paper, published in 1984, found that the productivity of union workers is between 44 and 52% higher than non-union workers.