Prevailing Wage Could Increase Costs By 10%

From this week’s House Republican Newsletter:

On Thursday, February 5, House Study Bill 149 was introduced in the House Labor Committee. HSB 149 mandates a prevailing wage standard for most public works projects.

The Fiscal Note from 2007 stated that Workforce Development would need $889,000 and 11.0 new FTEs, the Board of Regents would need $556,000 and 6.0 FTE positions in order to comply with the bill. In addition, construction cost estimates by the Board of Regents, Iowa State Association of Counties, and the Iowa Association of School Boards all indicate an approximate 10 percent to 12 percent increase in project costs due to prevailing wage.

Source: Fiscal Memo

Prevailing wage laws were created by the Federal Davis-Bacon Act, which was adopted in 1931. The roots of the act lie in New York Congressman Robert Bacon’s congressional district, in which a construction contract was lost to an out-of-state construction company “who brought some thousand nonunion laborers from Alabama into Long Island, New York…” The act created wage requirements specific to duties performed on worksites in accordance with union practices. Since the creation of the Davis Bacon Act, states have enlisted their own versions of prevailing wage laws at the state level.

One of the major problems of the prevailing wage law is the way in which it is determined. Most states with a prevailing wage law determine this law in the same manner as the US Department of Labor, by survey of the modal wage rate per each construction classification. In other words, the state will send out a survey to construction companies asking what they pay each worker, and then based on the surveys returned determine that the most commonly occurring wage is the prevailing wage. If there is no wage that meets the state’s modal requirements, a weighted average is determined and set as the prevailing wage. In Indiana for instance there are hundreds of hearings to determine wages.

The bill requires a contractor to pay workers the same hourly wage plus fringe benefits for certain public improvements as the contractor would pay workers for a private construction or improvement project. The bill allows the per-hour wage rate to be based on what is normally paid in the area by contractors for similar projects, and to be adjusted on a yearly basis by the department of workforce development.

The bill includes specific criteria, such as cost of the public improvement and the population of the city or county, for the project to qualify for the prevailing wage rate. The wage rates that the workers must be paid shall also include benefits such as medical care, life insurance, overtime pay, and vacation and holiday pay. The bill applies to any public improvement that receives money from a public body and includes most types of public improvements from construction to road maintenance.

Here are some of the major problems with the prevailing wage bill:

  • Prevailing wage laws negative economic impact derives not from requiring union rates, but from requiring rates higher than the free market would offer and interfering unnecessarily in the labor-management relationship of private firms.
  • Virtually all prevailing rates are set for the job classification system found in collective bargaining agreements that characterize the construction work force by union trade jurisdiction and further subdivide employees by job classification. The effective impact therefore, is to force nonunion firms to use union job classifications, regardless of how inefficient they might be.
  • Elimination of prevailing wage will not bring back the depression, or knock union firms out of business. There are 18 states without prevailing wage laws and there are construction workers and even union contractors operating in those states.
  • Nonunion firms have been more successful on projects because of their ability to defray costs and diversify job skills versus union models which restrict tasks union employees can perform.

Everyone agrees that workers deserve to be paid fair wages. However, this legislation is not fair for the workers or the contractors. Iowans pride themselves on hard work and honesty. This legislation is attempting to address a problem we do not have. HSB 149 places an undue burden on local governments and will undoubtedly cause an increase in property taxes or a scaling back of public works projects. Many rural contractors will no longer be in business if this legislation is passed.

The fact is this legislation is not about improving safety in the construction site. HSB 149 is an attempt increases costs for public construction projects and those costs are passed along to the average citizen through higher taxes. Many prevailing wage states have realized the negative impact of the legislation. The last state to pass prevailing wage legislation was Minnesota, in 1973. Nine states have since repealed their laws, including Ohio. When Ohio repealed the prevailing wage for school construction, the projects saw a 10 percent reduction in project costs.

In 2007, when the House Labor Committee debated HF 810 (the previous version of prevailing wage), a contractor testified that it bid on two identical projects, one in Iowa and one in Minnesota. Due to Minnesota’s prevailing wage law, the project in that state cost $16.3 million, compared to $13.5 million for the project in Iowa. Having a prevailing wage mandate raised the cost of the project by almost $3 million. (Subcommittee on HSB 278, March 8, 2007, House Lounge)

House Republicans will judge every bill this session with the question “Does this bill help grow Iowa’s economy?” HSB 149 will hurt Iowa’s economy and will be opposed by the caucus.

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