Imagine your computer is in need of repair, but you are forbidden from finding the cheapest, highest-quality technician possible. Instead, state law requires you to wade through bureaucratic paperwork and forces you to pay the technician far more than the market price.
Though such a law would sound ludicrous, this is exactly what state law requires of Michigan’s government. It’s called the prevailing wage, and it forces the state government to pay higher union-scale wages on taxpayer-funded construction work regardless of whether the contractor is unionized. Typically, the law has an especially large impact on construction for roads, public schools and universities. According to the Associated Builders and Contractors of Michigan, projects subjected to the prevailing wage can pay labor costs up to 60 percent above market value.
The law unnecessarily costs Michigan taxpayers millions of dollars a year in waste by forcing the state to pay higher costs on construction. According to a 2013 study by the Anderson Economic Group, $224 million could be saved annually on school and university construction work alone by repealing the prevailing wage. As the state legislature contemplates scaling up road construction by $1.2 billion, these artificially-increased construction costs will become an even bigger drag on taxpayers.
This waste is particularly harmful to the two services Michigan voters continually claim are the most underfunded: Schools and roads. Rather than spending this money on better teachers or safer bridges, the prevailing wage forces the government to spend it on less construction per dollar. When the opportunity cost of this waste is considered, it is clear how wasteful this law is.
The prevailing wage is antiquated by any standard. It was first signed into law in 1965 when a much higher percentage of construction workers were unionized. Even though the percentage of unionized construction workers has since fallen to less than 19 percent, the law still requires the state to pay high union-scale wages. Lower rates of union membership mean that the prevailing wage has a much higher cost because it is now far more likely that the government could find a cheaper contract without paying union-scale wages.
Proponents of the prevailing wage claim it is necessary to maintain the middle class because poorer construction workers would be subjected to unlivable wages. However, if there is one group of workers that needs help, it is probably not construction workers. According to the Bureau of Labor Statistics, the average hourly wage rate for all private employees for July 2014 is $23.23, while the average construction worker (both private and public) earns $25.57 per hour.
The state should follow the example of several municipalities in Michigan, including Bay City and Eaton County, which decided to repeal prevailing wage ordinances in the last couple years. In fact, several recent bills in the State House and Senate have been proposed to repeal the prevailing wage in the last year; however, none have been taken up.
The reason the legislature has dithered on repeal is a classic example of concentrated benefits and dispersed costs. Even though taxpayers lose millions on the prevailing wage, a select few construction workers in the public sector benefit. Unions representing those workers face much larger incentive to lobby for prevailing wages than the average taxpayer who faces much more dispersed cost. Therefore, the antiquated law has remained on the books.
Until those public choice problems are overcome and the prevailing wage laws are repealed, Michigan taxpayers will suffer from millions in waste, schools will remain underfunded and spend far too much on construction, and road construction will face the roadblock of higher labor costs.
