Some Opponents of Prevailing Wage Are Really Bad at Math

A new report by the Midwest Economic Policy Institute finds that prevailing wage repeal cannot result in “44 percent savings” in Wisconsin.

Full Report PDF: Prevailing Wage Repeal Cannot Result in “44 Percent Savings:” Evidence from Southwestern Wisconsin

Prevailing wage supports blue-collar workers employed on public construction projects. By preventing government from using its massive purchasing power to undercut local standards, prevailing wage laws ensure that workers are paid a competitive, up-to-date wage and benefits package determined by private actors.

Fully 75 percent of recent peer-reviewed economic studies find that construction costs are not affected by prevailing wages. As summarized by the independent Wisconsin Legislative Fiscal Bureau in 2015:

“[T]he evidence on prevailing wage effects generally range from relatively small effects to no statistically significant effects….These findings echo a 2007 report prepared by the nonpartisan Minnesota Office of the Legislative Auditor which, in a review of the literature that measured the relationship between prevailing wage laws and the cost of construction, concluded that while some studies found a small impact on costs, more comprehensive studies have found that the impact is not statistically significant. These findings are further corroborated in a comprehensive review of research related to prevailing wages and government contracting costs by Mahalia (2008).”

However, in spite of the conclusions of economic experts and independent fiscal analysts, state legislators in Wisconsin have cited a 2015 report by the Wisconsin Taxpayer Alliance, which claimed that prevailing wage “forces taxpayers” to pay 44 percent more than the market rate based on hypothetical comparisons – a claim that the Midwest Economic Policy Institute fully critiques in the new report.

The report finds:

Anyone claiming that prevailing wage repeal would result in significant construction cost savings (20 percent or more) either does not understand the construction industry, is bad at math, or expects people to work for free.
The 2015 Wisconsin Taxpayer Alliance study claiming that prevailing wage inflates costs by 44 percent is an apples-to-oranges hypothetical.
The data used in the 2015 study has numerous limitations and flaws: it excludes benefits and training contributions, it does not account for skill level or overtime, it over-represents residential construction, it uses information that is up to three years old, and it attributes construction work to contractor business addresses rather than the physical location of the project.
A case study of Wisconsin counties near the border of Iowa, a state without prevailing wage, finds that road construction workers earn 8.1 percent more on average than their Iowa counterparts using actual economic data.
Multiplying the 8.1-percent wage difference by labor’s share of total costs for highway, street, and bridge construction contractors (21 percent) reveals that the maximum “cost savings” that could occur without prevailing wage are 1.7 percent– an estimate which fails to consider changes in worker quality, worker productivity, and job turnover that would offset these cost savings.

Ultimately, gutting prevailing wage would undermine the local market, as happened along Indiana’s southern border. After Indiana weakened its policy, higher-paid public works construction employees in the state’s 13 southern-most counties were replaced by lower-paid workers across the border in 14 Kentucky counties. Public works employment declined by 21.2 percent in the Indiana border counties but rose by 20.7 percent in the lower-paid Kentucky counties. This redistribution of jobs and earnings to out-of-state contractors has an adverse impact of income tax revenues and sales tax revenues.

The Midwest Economic Policy Institute report should be a cautionary note to Wisconsin lawmakers who are considering full repeal of the state’s prevailing wage law. The Wisconsin Taxpayer Alliance study is economically unsound, uses data that is inappropriate for prevailing wage evaluations, and reports an unrealistic cost savings figure that has no basis in reality.