On Jan. 6, 2015, as snow fell on the streets of Indianapolis, Indiana State Representative Jerry Torr introduced House Bill 1019, which would repeal the state’s prevailing wage statute. The 80-year-old law required that tradespeople be paid a set rate on state and locally funded projects, and, as such, had been in the crosshairs of free-market economists and small business owners for decades. In fact, this was the Republican caucus’ third attempt in five years to repeal or significantly alter what in Indiana was called the “common construction wage.” While the first two bills died in committee, this one sailed through the legislature and was signed into law by then-Governor Mike Pence in the first week of May. Effective July 1, 2015, contractors no longer had to factor in the common construction wage when bidding on public works projects.
As it turns out, Indiana was just the first of several states to recently repeal or alter its prevailing wage law. That same year, Wisconsin scaled back its statute to cover only municipally funded work, and Nevada more than doubled the minimum cost for prevailing wage-eligible projects. West Virginia eliminated its law altogether in 2016, as did Arkansas and Kentucky in 2017. An initiative to do away with Michigan’s statute is in the works, and Missouri lawmakers will most likely make a renewed push to repeal their state’s law in 2018 after a narrow defeat in the first half of 2017.
Explaining the “how” of this phenomenon is easy: In almost every case, the state legislature flipped from a Democratic majority to a Republican one in the election directly preceding the introduction of a bill. The “why” and “what happens next,” though, are much thornier questions — with answers you might not necessarily expect.
An age-old question
The debate over prevailing wage laws is — and has been for quite some time — an economic one. Those opposed to setting wage floors argue that they artificially raise the cost of construction and hamstring local governments already strapped for cash. Proponents, on the other hand, warn that their absence would create a “race to the bottom” and drive skilled workers out of an industry already facing a labor shortage.
Yet the concept of construction wage floors is rooted in geography. In the mid-1920s, U.S. Congressman Robert Bacon of New York watched helplessly as a contractor from Alabama outbid Empire State companies to build a Veterans Bureau hospital in Long Island — primarily by paying its laborers far below what local tradespeople made. “It seemed to me,” Bacon reasoned, “that the federal government should not engage in construction work in any state and undermine the labor conditions and the labor wages paid in that state.” Congress agreed, and in 1931 passed the Davis-Bacon Act, which established a mechanism for setting minimum construction wages (based on the local going rate) on federally funded projects.
States quickly followed suit, and by 1967 all but nine had passed their own prevailing wage laws governing locally funded projects — often called Little Davis-Bacons. With regard to their original intent, they succeeded. Kevin Duncan, a professor of economics at Colorado State University – Pueblo, has coauthored nearly a dozen peer-reviewed studies on prevailing wage laws and testified on the topic before legislatures in half a dozen states.
“Quite simply, these laws protect work for local contractors and their employees,” he says. “And information from the U.S. Census indicates that states without prevailing wage laws have more work done by contractors from out of state.”
But by the late 1970s, as the economy faltered, budgets began to take precedence over the protection of local contractors, and state legislatures began looking to drive down capital construction costs by increasing competition. One of the best ways to do that,
they concluded, was to do away with prevailing wages. Between 1979 and 1988, nine states repealed their laws.
Ben Brubeck, vice president of regulatory, labor & state affairs for the Associated Builders and Contractors (ABC), thinks the construction industry is experiencing a similar budgetary revolt now.
“You’re starting to see a lot of folks be a lot more budget conscious, especially given that taxpayer dollars are a finite resource,” he says.
And as more once-blue states shift red and usher in more fiscally conservative approaches to governing, those now in charge are putting prevailing wage laws in their crosshairs.
“What you’re seeing,” Brubeck says, “is the result of pent-up demand.”
Who will prevail?
That was certainly the case in Indiana. The legislature altered or attempted to alter its prevailing wage law multiple times in the years preceding repeal. Until 2010, a new wage rate was established for each project bid out in the state by a five-person committee that included a representative from the governor’s office, the local AFL-CIO, and the project owner. In 2011, though, the law was changed to replace the governor’s rep with one from the local ABC chapter, and now a rate would be set every three months and apply to all projects bid by a given agency.
That same year, State Senator Dennis Kruse failed to pass a bill that would exempt school construction from prevailing wage requirements, but in 2012 the legislature successfully raised the cost threshold for eligible projects from $250,000 to $350,000. Then, in 2014, the Republican caucus made a spirited but ultimately unsuccessful attempt to kill the law altogether.
So by the time the 2015 repeal effort got underway, IBEW Local 481 in Indianapolis was already back on its heels.
“We jumped on it right away, lobbied, rallied, and did everything we could to save the law,” says Business Manager Steve Menser. “But they can pretty much push through whatever they want.”
The chief argument in favor of repeal made for a powerful talking point: By doing away with prevailing wages — which often favored the local union rate — more nonunion contractors could afford to bid on public construction projects. And with the increase in competition, construction costs would go down, saving taxpayers money — or at least giving them more bang for their buck.
“Any time you can let the market work freely, that’s good,” says J.R. Gaylor, president of the ABC of Indiana. (Note: The executive director of the Central Indiana Independent Electrical Contractors declined to comment, citing a lack of knowledge of the legislation, and deferred to Gaylor.)
While it stands to reason that increased competition and lower wages would result in overall cost savings, those claims are notoriously difficult to prove. In the April 2017 study, “The Economic, Fiscal, and Social Effects of Ohio’s Prevailing Wage Law,” Duncan of Colorado State University–Pueblo and three coauthors found no statistically significant difference in the cost of schools built with and without prevailing wage requirements in Ohio between 2013 and 2016.
Peter Phillips, a professor of economics from the University of Utah (who has studied prevailing wage legislation for decades), found similar results when examining the cost of school construction in states with and without such laws in 1997: Those built in prevailing wage states averaged $76.86 per square foot, while those built in non-prevailing wage states averaged $76.23. In other words, there was a savings, but not much of one. Phillips says his subsequent studies have produced similar results.
“Proponents of repeal make their argument based on the idea that it’s going to save the public money,” maintains Phillips, who is careful to leave unsaid what he believes their true motivations to be. “But the case for that is weak and has not been confirmed. So their motivation, typically, is not an eagerness to save the public money.”
Brubeck, of the ABC’s national office, scoffs at those studies, noting that they were funded by labor groups.
“Professor Phillips has a point of view, and he’s hired specifically to get that point of view out and will find data and information to support it,” he says, while recommending a handful of studies that purport to poke holes in prevailing wage laws. (Phillips responds by pointing out that his work has been subjected to a rigorous peer-review process.)
One of the studies Brubeck suggests, a 2017 paper named “Prevailing Waste,” zeroes in on flaws in New York’s statute, particularly the mechanism by which wages are set. There union rates provide the basis for the prevailing wage in a locality provided that at least 30% of the workers in that area are union members, which, as one of the study’s authors points out, can hardly be considered prevailing.
“So fairly quickly we go from the notion of ‘let’s find out what the market says’ to ‘what is the wage negotiated through a collective bargaining agreement,’” says Kent Gardner, an economist with the Center for Governmental Research, a conservative think tank in Rochester, N.Y.
Which raises one of the stickiest issues related to prevailing wages: They’re set a little differently in every state. Indiana had its five-person committee. Ohio uses the federally determined rate. Other states conduct surveys to find the most common wage. Brubeck will concede that it’s not necessarily the concept of prevailing wage that ABC opposes; it’s the sometimes-byzantine method by which a wage is determined. He supports reform but says it’s rarely an option.
“We have seen efforts to fix a state’s mechanism,” he says. “But in the absence of honest efforts to reform, I think fully repealing it is where things are ending. It’s a lot easier than going through a long, drawn-out process where everyone isn’t bargaining in good faith.”
A disaster deferred?
One point that’s hard to argue is the effect prevailing wage repeal has on wages. Keeping in mind that publicly funded projects typically only account for about a fifth of construction work in any locale, when prevailing wages go away, tradespeople make less money — which, Phillips says, is the point.
“Of course, no proponent of repeal is going to stand up and say that,” he says. “But that is one of the avowed purposes.”
Workers in Indiana are already feeling those effects. According to Bureau of Labor Statistics data — which includes wages on public and private work — the state’s electricians saw their average hourly pay climb steadily from $24.09 in 2007 to $28.43 in 2015. Yet in 2016 — one year after repeal — average hourly pay dipped 70 cents to $27.73. Over the same 10-year period, the U.S. average also rose without falling off in 2016. While a nearly three-quarters-of-a-dollar dip may not seem like much, it’s important to note that each annual average is, in fact, a three-year aggregate. So that 2016 wage? Since that number includes 2015 and 2014 figures, the decrease in 2016 would have had to be more drastic than 70 cents to move the needle as much as it did.
What’s harder to parse — at least after two years — is whether Indiana union contractors’ claims of a post-repeal business apocalypse have come to pass. EC&M requested information on all public work contracted out by the city of Indianapolis between July 2015 and July 2017, which amounted to 116 projects valued at nearly $90 million. Less than half would have met the $350,000 threshold under the previous law, and only a fraction involved vertical construction that would have required electrical work. Perhaps most striking is that only one project went to a non-Indiana general contractor. (City documents do not name subcontractors, but electrical industry members in the area say it’s unlikely a local GC would hire an out-of-state sub.)
The market for school construction and renovation — usually a steady source of public work for electrical contractors — has evolved, but not in the way proponents of repeal might have expected. Indianapolis Public Schools, which contracts its own projects — and therefore isn’t included in the city data — has an annual capital improvement budget of $8 million. The district hasn’t embarked on any new construction since 2010, but is currently updating the wiring in its existing 65 schools. And an employee in the operations department says there has actually been a decline in the number of bidders — though it’s unclear what influence, if any, the repeal had on that change.
As for union electricians, Steve Menser of IBEW 481 reports that overall man-hours are up in central Indiana. Despite a slowdown in public work (“Our mayor is very conservative on spending,” he says), hospital construction and a large power plant project have kept his workers busy. It won’t be possible to see the real effects of repeal until the public work comes back.
Phillips, on the other hand, says the lasting results could take longer to see. As wages decrease — and, presumably, union contractors lose more work — over time less money could go into apprenticeship programs, eventually degrading the quality of work. Ironically, the one party that stands to lose the most in that scenario is local government.
“It has an interest in assuring that next year, 10 years from now, or 50 years from now — when it needs construction services — there’s a qualified labor force to provide those services,” he says. “So it behooves them to continually invest in the future of the industry.”
Halverson is a freelance writer based in Seattle. He can be reached at [email protected].
