Michael Hicks is the George and Frances Ball distinguished professor of economics and the director of the Center for Business and Economic Research at Ball State University. His column appears in Indiana newspapers.
Indiana has just passed legislation that would eliminate the "prevailing wage" for public construction projects. Indiana passed what is known as a "little" Davis-Bacon Act in 1935. That act today requires that any non-roadway project involving more than $350,000 in public funds would require a five-person committee to set wages for contract workers. This committee consists of representatives from local business, labor, contractors, government and taxpayers.
Indiana's new legislation eliminates this rule so wages are no longer part of the bidding process for public works projects. Proponents of the measure point to large cost savings to public infrastructure, while opponents argue it will hurt local construction companies and workers. Given a great deal of good research on the matter, it might be wise to see what recent studies conclude on these issues. From my reading of the available research, several recurring themes emerge.
First, the passage of this law will have little or no impact on skilled workers. Their effective wages are already primarily set in markets, not by committees. The biggest wage impact will be on low-skilled workers in construction, whose wages are now set by committees. Markets will value them less and we ought to expect fewer of them on construction sites, with lower pay. The best studies on the issue also point to a reduced union wage premium and more racial equality in construction wages. The latter is an important point, because racial discrimination as part of the Davis-Bacon Act has been a persistent issue in its application. Why this might be the case is related to a later point.
Second, there have been several studies of the effect of prevailing wage on construction costs. They overwhelmingly point to little or no impact on individual project costs of eliminating prevailing wage. One of the best studies looked at the Midwest where legal changes offered a clean natural experiment and found no savings. I think that is the likely impact in Indiana because most contractors will hire more skilled workers and fewer unskilled workers as several have testified.
The real impact of the repeal of the prevailing wage law is that it weakens the largest source of public corruption in local government: the over-cozy relationship between public officials and the participants of the prevailing wage committees. This relationship makes it too easy to trade political support for construction projects with local vendors and unions. The end of prevailing wage spreads the competition for contracting outside the voter pool.
The impact should be obvious. The limitations on the cost studies outlined above are that they can only identify cost overruns on individual projects. Whether or not a project was unnecessary or shoddily built is not part of the construction data. It is, however, part of the common experience of local government construction projects.
Many folks cannot say so openly, but taxpayers, good contractors, skilled workers and honest politicians should welcome the end to the prevailing wage laws in Indiana.