The prevailing wage elements of the Davis-Bacon Act and the state versions of prevailing wage legislation are designed to increase wages for construction workers involved in publicly financed construction projects. Federally financed projects are controlled by Davis-Bacon, while state-funded ones are governed by state prevailing wage laws. Most jointly funded projects are also subject to Davis-Bacon requirements for prevailing wage.
An inescapable aspect of prevailing wage laws is that to affect wages they must be set above the market equilibrium. In other words, they always artificially raise the cost of labor on public construction projects. That there is concentrated opposition by labor interests to repealing these laws offers compelling evidence that they set prices above market equilibrium.
However, this does not mean that these wage rates depart significantly from market equilibrium. Nor does it mean that in the absence of prevailing wage laws these labor markets would be in competitive equilibrium. There are surely some local construction markets in which monopsony power sustains wages beneath the competitive equilibrium. These factors affect the empirics of tests of PWL on wages, costs and labor share of production. Indeed, the Davis-Bacon Act has faced a longstanding debate over its intent. Goldfarb and Morrall provide a good discussion of that debate regarding the presence of federal monopsony.[2]
The actual effect of PWL, including Davis-Bacon, is an empirical matter.
Higher wages, due the presence of a prevailing wage law, motivate firms to alter the capital-labor ratio in construction. Supra-normal wages would result in more capital-intensive production and reduce the labor share of production. Importantly, this clouds the interpretation of wage studies on this issue, since relaxing the provisions of prevailing wage would potentially change the skill mix of employees. O’Connell outlines this issue well.[3]
Nonwage compensation may also be affected by the provisions in prevailing wage legislation. This could include benefits, which are often invisible to empirical analyses, as well as investment by firms in such matters as worker training or safety. Phillips et al. provides a review of this issue.[4]
Prevailing wage requirements affect the procurement process, motivating researchers to analyze several issues as disparate as the effects on bidding practices and the advantages of incumbent firms. This latter effect has also been studied with some rigor since the protection of incumbent construction firms was a likely intent of the Davis-Bacon Act.[5]
The diversity of state prevailing wage laws motivates researchers to look at a wide variety of empirical tests on wages, construction costs, labor share of production, bidding practices, workplace training and safety. This paper addresses two of these, but before moving to our tests, we provide a review of the literature.