Saturday, May 22, 2004

The Problems of Prevailing Wage Law
Never heard of Prevailing Wage Law? If you are a concerned citizen, you maybe should research it. It is a major reason why public projects cost so much. In times of yesteryear, many states enacted laws designed "to protect" the workers in the labor market from distortions that would be wrought through cheap government labor. To do so, many states and the federal government (the latter for its own projects) mandate that workers be paid the "prevailing market wage". Sounds great, right? The government has a lot of bargaining power, and this is just a law to ensure that workers are just being paid what they are worth, eh? Perhaps not -

1) A joke I once heard is that to find the legal prevailing wage, you take the real market wage and multiply it three or four times. Since the setting of the wage is a finding of fact by an agency, my understanding is that it will usually receive a large amount of deference if challenged in court (I'll have to email my prof, Tino Cuellar on this question), leaving it ripe for corruption. Give the high government official a small donation, have her appoint "understanding and sympathetic to the needs of labor" men to the board that sets the prevailing wage, and your Union stands to profit enormously from wages that were many times greater than were paid. If you are a union official and want to make the scam even more legit, arrange for a very small project with astronomical wages that your union will be willing to take a loss on. Point to the inflated wages of that project as the real prevailing wage. Get the agency to agree. Get all your workers overpaid.

2) Even if the exact market wage would be set as the prevailing wage, city/state/and federal government projects might still be overpaying for their workers. Its possible that the workers who work on a governmental contract may not be as good as the workers who work on a private contract. This could be true overall (they are just lower quality workers who got the job based not on skill but on political appointment) or narrowly (the worker is usually industry average, but since it is a government project with lower standards, he works at with less effort).

3) Since workers are being overpaid, they have every incentive to push for more construction than is needed in the government sector. Since the politicians get bribery from the workers, they have added incentives to engage in an increase in government projects. The result is that prevailing wage law not only astronomically increases the cost of government projects, but it might also increase substantially the actual number of these projects!

Clearly, there quite a few potential problems with these laws. Hopefully, the states that have them will rethink their implementation in the future.

Update: Here is another post on the subject (where it was briefly illegal to volunteer in California)

Update: Here is another post on the subject, explaining how prevailing wages can get set so high.

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