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July 26, 2013

ERIC SCHANSBERG: Prevailing wage in construction next target for Statehouse?

Minimum-pay law hikes public construction costs.

A pre-vailing wage is a legal arrangement to set minimum compen-sation (wages and benefits) in public-sector construction at rates above where market participants (demand and supply) would otherwise reach equilibrium.

As always, the basic choice is between markets and government; we either allow people to do what they want, or not. And as always, there are both ethical and practical considerations. Ethically, one should ask how this could be a role for government. Practically, how will the law work in practice?

Prevailing wages (or “common wages”) are state and local versions of the 1931 federal Davis-Bacon Act. They exist in 32 states, including Indiana and all surrounding states. They are imposed on a minimum project size of $350,000 in Indiana. (The Davis-Bacon threshold is only $2,000.) Typically, prevailing wages are set at or near the “prevailing” union compensation.

By definition, prevailing wages are a minimum wage applied to one segment of the labor market. It benefits those who keep their jobs, but imposes a burden on owners (who will lose money or avoid the regulated market) and taxpayers. Although it is difficult to calculate the cost increases — particularly when trying to aggregate those estimates — it is clear that the artificially high wages will increase costs significantly.

Public Choice economists have observed that motivated and powerful interest groups are regularly able to get politicians to impose subtle costs on the general public in order to pocket concentrated benefits. For example, we could take $1 from 300 million people and redistribute $30,000 to 10,000 people.

The former group would be mildly irritated if they notice at all. The latter group will invest considerable energy in political markets to see the legislation pass. In a democracy, small interest groups often carry the day against the far-larger but far-less-energetic general public.

With prevailing wages, the model is more complicated since union workers benefit disproportionately and often at the expense of non-union workers. So, we have a powerful interest group working against a less-powerful interest group and the general public.

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