Weakening prevailing wage by raising a contract threshold has negative impacts on local contractors, construction workers, and economies, according to a new study.
The report, An Analysis of the Impact of Prevailing Wage Thresholds On Public Construction: Implications for Illinois, was conducted jointly by the Illinois Economic Policy Institute (ILEPI) and the Project for Middle Class Renewal (PMCR) at the University of Illinois at Urbana Champaign.
It is the first study to focus specifically on prevailing wage thresholds.
A prevailing wage threshold is the minimum cost of a public project at which point workers must be paid prevailing wage rates. Publicly-funded projects below the threshold are exempt from the law, while those above are covered. Contract thresholds vary by state, from those with no threshold (such as Illinois) up to $500,000 in Maryland.
Although the study forecasts effects on Illinois if the state were to introduce a prevailing wage threshold, the report is applicable to any state that is considering raising a contract threshold.
The Economic Data
Higher contract thresholds lower business revenues for in-state contractors. The data indicate that increases in prevailing wage thresholds incentivize out-of-state contractors to enter the market.
- A $100,000 increase in a prevailing wage state’s contract threshold is associated with 1.2 percentage-point drop in the market share of in-state contractors (±0.5 points).
- A $100,000 threshold change in Indiana from 2012 to 2013 had no impact on the number of bids submitted on public projects, indicating that the threshold hike did not increase competition.
- Impacts for businesses, however, may be larger in Midwestern states, as shown below:
Higher contract thresholds reduce wages and health insurance coverage for construction workers. Differences in coverage thresholds across and within states provide an opportunity to understand how thresholds affect construction workers. Every $100,000 threshold increase is statistically associated with:
- A 0.5-4.9% decrease in the annual incomes of construction workers.
- A 0.3% decrease in health coverage for construction workers.
- Mixed impacts on employment for construction workers.
Should Illinois Implement a Threshold?
The objective, reproducible analysis finds that introducing a threshold would have negative consequences for public construction in Illinois. Actual public bid data suggest that the median cost of all public projects in the state is about $300,000. If Illinois introduced a threshold of $100,000 for coverage under the state’s prevailing wage law:
- About 25 percent of all public projects would be affected.
- The average number of bids would be unchanged.
- Illinois contractors would annually lose $139 million in business revenue to out-of-state construction companies on public projects that are funded by Illinois taxpayers.
- Annual labor income of blue-collar construction workers in Illinois would decline by $53 million.
- Up to 2,040 construction workers in Illinois would lose their health coverage at work.
These predictions generally align with a previous forecast on the impact of weakening prevailing wage in Illinois.
The data are clear. Raising the threshold lowers the bar in public construction.
For the full report, click here [PDF].