Economic analyses of state prevailing wage laws and road construction costs are sparse.[*] Only four studies make direct comparisons in this area. So, we must rely on a broader suite of research to evaluate the role state-level prevailing wage laws play in construction costs. The following review focuses on three types of studies. First, there are case studies or small sample studies with either specific data on bids or costs. These weakly mimic a natural policy experiment. That is not a critique, since there are often important policy questions at issue, and few research options that permit clear identification of PWL effects.[†]
Second, we examine studies that have microdata on construction costs for non-highway projects and use it to construct a causal estimate of the effects of prevailing wage laws on costs. These studies use several different methods, which we describe briefly. Finally, we review the effects on road construction costs that are directly assessed in four studies.
Two studies of bids for large samples of public construction projects report no wage differences between prevailing and non-prevailing wage bids.[6] These are within a single state (Ohio) and illustrate the challenges of interpreting single-state estimates. Ohio has a larger than typical threshold for contract costs to trigger prevailing wage rates, but the presence of prevailing wage laws may affect all construction markets in the same regions. This is a common problem in evaluating projects within the same labor markets.
Studies which make comparisons of contract costs for projects uniformly report higher costs for prevailing wage projects. The first of these studies reported large geographic and prevailing wage costs disparities in New York state. The prevailing wage comparison most applicable to this research is a 28% cost differential.[7] Kersey performs a similar study comparing median wage rates and legally established prevailing wage rates in Michigan, finding 10% to 15% added cost to public construction projects.[8] Rosaen and Taylor updated their 2013 study reporting cost increases of roughly 10% for school construction.[9] They were strongly criticized by Philips for, among other things, overestimating the labor share of workers affected by prevailing wage.[10] The Vermont Legislature commissioned a study that estimated the internal costs of prevailing wage to be in the 5% to 12.5% range.[11]
Estimates of prevailing wage include Vedder, who estimated a 10% cost increase in those occupations affected by state prevailing wage legislation.[12] Glassman et al. examined wage level differences in prevailing and nonprevailing wage markets of 9.9%, with the prevailing wage markets facing the higher wages.[13] Kessler and Katz use Employment Security 202 administrative data to test the effect of prevailing wage on union wage premiums in affected regions.[14] This is the most important of the studies we review, both for its method and its depth of analysis. I impute their construction cost estimates from their union wage premium to be from 2% to 5% of public projects, using labor share of 20% to 30%.[‡]
Studies with micro data on nonroad construction projects focus primarily on schools, where data are more readily available. These studies include Azari-Rad, Phillips and Prus, who report no effect of prevailing wage laws on school construction costs in a large sample of contracts during the 1990s.[15] Bilginsoy and Philips perform a similar test in Canada, which has comparable prevailing wage legislation in its provinces, and also found no effect.[16] Duncan, Philips and Prus report no differences in construction costs when comparing private and public school construction costs.[17] This natural experiment in cost differences would appear useful in identifying the effects of prevailing wage. However, prevailing wage may influence construction wages market-wide, which would bias these results.[18]
Keller and Hartman provided a review of multiple types of projects and estimates for their own analysis of school projects.[19] They report that prevailing wage laws increase school construction costs by 2.2%. The most extensive study of the issue was performed by Vincent and Monkkonen, which examined 3,000 school projects between 1995 and 2004.[20] This study used state variation in thresholds for projects, types of wage-setting agreements and state and local building requirements in their analysis. They report school costs in projects affected by prevailing wage laws are 13% higher than in those not affected.
In a unique study of state projects that used confidential state administrative data, Clark found a 28% wage difference in prevailing wage versus non-prevailing wage projects.[21] I impute that this results in a roughly 5% to 10% increase in project costs.[§] Kelsay, Wray and Pinkham studied project costs across a 12-state region in the Midwest and found no difference in construction costs across prevailing wage and non-prevailing wage states.[22]
Four studies of construction costs offer a modest level of analysis on a large cost issue. Fraundorf, Farrell and Mason study nonresidential building construction projects in 1977-78, finding a 26.1% difference between prevailing wage and nonprevailing wage projects.[23] Duncan offers two studies of highway contracts in Colorado, comparing costs on state and federal roads. Colorado repealed its prevailing wage legislation in 1985, offering an identification opportunity in that state.[24] He reports no impact on costs, and no differences in effects on disadvantaged businesses. Vitaliano estimates state highway and maintenance productivity, finding that using prevailing wages adds roughly 10% to the cost of construction.[25]
This literature does not provide a clear picture of consensus or method of analysis. Of the 22 studies cited here, 10 report no effects on construction costs due to PWL. There is considerable overlap in the study teams here, with only three wholly separate groups of authors. They employ case comparisons and econometric studies of large samples to draw these conclusions.
Those who report higher construction costs due to prevailing wage use the same methods as those who do not. There are notably large sample sizes on both sides, and unique data sets employed across all methods. In terms of journal reputation, the better studies all find some prevailing wage effect on costs.[**] However, much high-quality work by well-known scholars with highly varied findings was prepared for policy debate, not for the academic literature. Moreover, the specificity of the research question biases the journal placement of prevailing wage work toward field journals in labor economics.
These studies do not provide clear evolution over time. There is no evidence that later or earlier studies report different effects, as is the case with other labor market regulations, such as right-to -work laws.[26] Also, there are a wide variety of prevailing wage studies that examine issues not relevant to this study, such as those related to worker demographics, productivity and compensation. Duncan and Ormiston provide a very well-organized review of the multiple research questions posed about the effects of prevailing wage.[27]
We provide a table review of the literature cited above in two tables. Graphic 1 summarizes those studies that report a cost effect of prevailing wage, and Graphic 2 summarizes those studies that find no cost effect. A graphic of effect sizes is reported in Graphic 3.
Graphic 1: Selected Literature Reporting Cost Effects of Prevailing Wage
Graphic 2: Selected Literature Reporting No Cost Effects of Prevailing Wage
Graphic 3: Cost Effects (Percent) of Prevailing Wage Studies, 1984-2020
[*] This is not the first time Mackinac Center scholars have performed reviews of reports relating to prevailing wage. Of recent note are a series of papers produced by the Midwest Economic Policy Institute. These reports analyze prevailing wage laws in a variety of states and produce similar results in each case: states with prevailing wage laws benefit from them and those without are harming workers, tax revenues and whole communities. For more information, see: Michael D. LaFaive and Ronald Klingler, “Prevailing Wage Repeal Critiques: Cookie Cutter Criticism” (Mackinac Center for Public Policy, March 3, 2020), https://perma.cc/4PMM-7DL9.
[†] For additional commentary on recent prevailing wage studies, see: Michael Thom, “Do Construction Wages Fall after Ending a Prevailing Wage Mandate?” (Mackinac Center for Public Policy, May 6, 2021, https://perma.cc/EG5M-ZSED; Michael Thom, “The Weak Case Against Repealing Prevailing Wage” (Mackinac Center for Public Policy, May 13, 2021), https://perma.cc/T3TC-WGHL; Michael Thom, “What Do We Know About the Impact of Prevailing Wage Laws?” (Mackinac Center for Public Policy, June 4, 2021), https://perma.cc/9BHS-CYKC.
[‡] This is calculated simply by multiplying their estimated wage rate differential by these labor share estimates.
[§] As with the Katz and Kessler imputation, I multiply the wage premium by the labor share to estimate total cost differences.
[**] These include Martha Norby Fraundorf, John P. Farrell and Robert Mason, “The Effect of the Davis-Bacon Act on Construction Costs in Rural Areas” (The Review of Economics and Statistics 66, no. 1, February 1984): 141-146, https://doi.org/10.2307/1924706; Daniel P. Kessler and Lawrence F. Katz, “Prevailing Wage Laws and Construction Labor Markets” (ILR Review 54, no. 2, January 2001: 259-274, https://perma.cc/QD7Z-9SVB; D.F. Vitaliano, “An Econometric Assessment of the Economic Efficiency of State Departments of Transportation” (International Journal of Transport Economics 29, no. 2, June 2002): 167-180, https://www.jstor.org/ stable/42747624.