Labor economists have explained that lower job turnover is one of the reasons why raising the minimum wage has very little impact on employment, contrary to classical economic theory. A higher minimum wage makes it easier for employers to recruit and retain workers, which reduces turnover costs. Dube, Lester, and Reich researched restaurant workers and teen workers in “contiguous counties” where the minimum wage was higher on one side of the border than on the other. They found that separations, new hires, and turnover rates declined significantly after a minimum wage hike. Job separations statistically fell by 25.3% for teens and 31.9% for restaurant workers.

Prevailing wage is essentially a minimum wage for public construction. Prevailing wages reflect local labor standards and require that contractors pay workers at least the rate established in the private marketplace through competitive practices. Contractors can pay more than the prevailing wage, and many do- especially if they are signatory to a collective bargaining agreement that sets higher rates.
An extensive body of peer-reviewed economic research conducted in the last 15 years finds that prevailing wage laws do not increase total construction costs, contrary to the claims of the policy’s opponents. Similar to the findings on the minimum wage, an independent report from the Wisconsin Legislative Fiscal Bureau concludes that that the cumulative “evidence on prevailing wage effects generally range from relatively small effects to no statistically significant effects… [W]hile some studies found a small impact on costs, more comprehensive studies have found that the impact is not statistically significant.”

There are many explanations for why prevailing wage does not cost taxpayers additional dollars. The first is that state prevailing wage surveys are both effective and reliable. Prevailing wage has no impact on bid competition, indicating that prevailing wages are reflective of the actual local market rates. Second, labor costs are a low and declining percentage of total costs in construction. Third, when construction wages increase, skilled workers replace untrained workers and contractors spend less on materials, fuel, and equipment costs. Productivity and efficiency therefore tend to increase due to prevailing wage laws.

Reduced job turnover may in fact be another explanation. As Executive Director of the Indiana, Illinois, Iowa Foundation for Fair Contracting Marc Poulos explains: “Simply put, prevailing wage is about crafting careers versus jobs. … [T]he Illinois worker being paid a living wage takes his livelihood seriously and treats construction as a career, not just a temporary job.”

Quarterly Workforce Indicators (QWI) published by the U.S. Census Bureau provide data on firm and worker characteristics for the entire construction industry in all states. Among the economic information available is data on “job separations.” Job separations occur if an employer fires an employee or if a worker quits. In construction, they can also occur the moment construction is completed if there are no projects to work on next.

Recent data indicate that the aggregate job separations rate is almost always higher in states without prevailing wage laws. The only times when the job separation of all states with prevailing wage laws matches the rate in states without prevailing wage laws are in the fourth quarter of the year – or October through December. In fact, given that most states with prevailing wage laws tend to be geographically located in the north, it is surprising that cold, snowy weathers do not push the separations rate even higher in these states than in their counterparts without the policy.

In total, over the past 18 quarters for which data were available, the job separation rate was 24.4% in states that had prevailing wage laws on average and 26.3% in states that did not have prevailing wage laws – which is a 1.9 percentage point difference.

The extent to which prevailing wage laws are in fact responsible for lowering the job separations rate by 1.9 percentage points is unknown. However, if a higher wage makes it easier to attract skilled workers and those workers treat their occupation as a career, not just a seasonal job, it is likely that a significant portion of this gap is attributable to prevailing wage. Future research should further investigate the true causal impact.

Replacing employees and training new workers can be very costly for employers. If prevailing wage reduces hiring and training expenditures for contractors competing for public projects, then the policy would lower bid costs and save taxpayer dollars.

Reduced job turnover may therefore be yet another reason why prevailing wage laws have no impact on total construction costs for schools, highways, low-income housing facilities, and other public projects.

Frank Manzo IV is the Policy Director of the Illinois Economic Policy Institute (ILEPI). Visit ILEPI at www.illinoisepi.org or follow ILEPI on Twitter @illinoisEPI. This post is part of the “Frankonomics” series.