Published date: 03/23/2023
Prevailing wages are the minimum wages set by the U.S. Department of Labor (USDOL) for specific trades, and they vary from one location to another. The determination of prevailing wages is based on a number of factors, including the type of work being performed, the skill level of the workers, and the local market conditions. This blog is meant to bust some common myths and misconceptions about prevailing wages.
Myth: Prevailing wages cost taxpayers more money by inflating construction costs on government projects by 20% or more.
Fact: The math doesn’t check out here. The average cost of labor on a public works project in relation to the overall costs is much too small for this to be true. Labor accounts for roughly 20% – 30% of costs of the average public works construction project. Some might argue that this ratio is substantially higher (and for many private projects, they can be), but most public works projects have much larger material costs. This makes labor a significantly smaller portion of the overall expenses – even when taking benefits and payroll taxes into account. If we were to look at a theoretical scenario – let’s say, for example, a project that would otherwise have 25:75 labor-to-materials ratio – and prevailing wages increased that labor cost by 15%, the result would be a 3.75% increase in total project costs. That’s the actual math.
But there’s more to it than that. Any increase in labor costs due to prevailing wages is frequently offset with significantly higher worker productivity and quality of work, more efficient utilization of materials and resources, and better safety standards that lead to less work-related injuries (due to higher-skilled workers being hired on the project). Most academic, peer-reviewed research has backed this up, some citing as much as 15% value-added for each skilled worker.
Myth: Prevailing wages only benefit construction workers and do nothing to help the rest of the community.
Fact: While prevailing wages provide sustainable income and benefits for construction workers, it doesn’t end there. The effect is compounding in that workers with higher incomes contribute more to tax revenue and stimulate other local economies. A peer-reviewed study on ten prevailing wage states from 2016 concluded that the total labor income was increased by $5 billion due to prevailing wage. A portion of that is then reinvested back into local communities through increased disposable incomes. Additionally, the study found that $42 billion in housing wealth was created from prevailing wages – which generates more property tax revenue.
Myth: Prevailing wage is a divisive measure that benefits certain demographics and excludes others like minorities, women and new craftspeople.
Fact: The construction industry has struggled with a skilled labor deficit for decades. The idea that apprenticeships and training programs exclude certain communities when so many projects are frequently understaffed is self-defeating. In fact, most apprenticeship programs are doing the very opposite by trying to grow the appeal to underrepresented groups in the industry as a measure to increase overall labor supply.
Myth: Prevailing wage does not account for differences in labor market conditions between rural and urban areas.
Fact: Prevailing wages are regionally surveyed and established by the market in any given area. The U.S. Department of Labor defines this process as determining the rate “paid to a majority of workers in a classification” within a county. In most cases, the rates tend to be much lower in rural areas than urban centers.
Myth: Prevailing wage laws only benefit unions. Open shop contractors and non-union employees cannot work on public works projects.
Fact: Prevailing wage laws provide sustainable wages for all workers, regardless of union status. Likewise, open shop contractors can still work on public works projects; they just need to abide by the prevailing wage laws like everyone else.
Is it possible that an open shop contractor has highly skilled and qualified workers that are not unionized? Absolutely – and they can work on the project and make prevailing wages. The whole intent behind the law is to prioritize high skilled labor and compensate them accordingly. It just becomes harder for contractors to justify using untrained and unqualified labor on projects when they will have to pay them the same amount as a skilled worker.
If you’d like to learn about solutions that can help manage Davis-Bacon/labor compliance and track and report on workforce programs on your prevailing wage projects, check out our labor compliance software.
These materials are being issued with the understanding that LCPtracker is not engaged in rendering legal or other professional services and is providing these for informational purposes only. If legal, accounting, or tax expert assistance is required, the services of a competent legal, accounting or tax professional should be sought.