Illinois House Testimonies on the Consequences of Repealing Prevailing Wage

On Tuesday, February 27, the Labor and Commerce Committee in the Illinois House held a hearing titled “Impacts of Repealing the Prevailing Wage.” Frank Manzo IV, MPP, Policy Director of the Illinois Economic Policy Institute (ILEPI); Robert Bruno, Ph.D., Director of the Project for Middle Class Renewal at the University of Illinois; and Kevin Duncan, Ph.D., Professor of Economics at Colorado State University-Pueblo submitted testimonies.

The following article provides condensed versions of those testimonies.


 

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Manzo on Repeal of Prevailing Wage in Indiana

Please CLICK HERE to read a full version of Manzo’s Testimony.

Good afternoon, Mr. Chairman and Members of the Committee. My name is Frank Manzo IV. I am the Policy Director of the Illinois Economic Policy Institute, a nonprofit research organization that provides candid and dynamic analyses on major subjects affecting the economies of Illinois and the Midwest– specializing in the construction industry.

Economic research finds that repeal of state prevailing wage laws decreases construction worker incomes and reduces apprenticeship training. For example, a peer-reviewed study published within the past week found that blue-collar construction income and benefits fell by between 4 and 11 percent in states that repealed their prevailing wage laws since the 1970s. Another analysis of nine states that repealed their prevailing wage laws since the 1970s found that repeal was associated with a 40 percent decrease in training.

Workers are better trained in states with prevailing wage, so they complete public projects more efficiently. The preponderance of economic research finds that prevailing wage does not affect construction costs. Since 2000, there have been 11 peer-reviewed studies that used regression analysis to examine the effect of prevailing wage on school construction costs. Ten of these studies, or 91 percent, find no statistical impact on the cost of school projects. Repealing prevailing wage does not reduce costs for taxpayers.

In January 2018, Ph.D. economist Kevin Duncan of Colorado State University–Pueblo and I released a study that assessed the effect of Indiana repealing its prevailing wage law. Indiana lawmakers completed repealed their law, called Common Construction Wage, on July 1, 2015.

Professor Duncan and I found that repeal has led to a host of negative impacts on workers and the construction industry, while failing to deliver any meaningful cost savings. After accounting for other factors, repeal of prevailing wage statistically decreased the wages of blue-collar construction workers by 8 percent, on average. However, repeal hurt the lowest-paid construction workers most, reducing their hourly earnings by 15 percent. By removing the minimum-wage floor, repeal worsened inequality in Indiana’s construction industry.

As construction occupations became lower-paying, they also became less skilled and less stable following repeal. Repeal increased the share of construction workers without a high school degree and increased worker turnover in public works construction. Meanwhile, turnover decreased in Illinois, Michigan, and Ohio– three bordering states that have strong prevailing wage laws. As a result, construction worker productivity grew 5 percent slower in Indiana than it did in the three bordering states.

Moreover, we analyzed actual bid data on public projects in 14 northern Indiana counties. Repeal did not increase bid competition. In the two and a half years before repeal, an average of 3 contractors submitted bids on each public project. In the two and a half years after, the average was still 3. And after reviewing over 900 bids on more than 300 school construction projects, we found that the average cost per public school project built with prevailing wage was not statistically different than without prevailing wage. In layman’s terms: Repeal did not result in any discernible savings for taxpayers.

It may be worth noting that this last finding validates a recent statement by Ed Soliday, a Republican from Valparasio who serves as Assistant Majority Floor Leader in the Indiana House of Representatives. In 2017, Rep. Soliday said: “We got rid of prevailing wage and so far it hasn’t saved us a penny.”

Lawmakers and taxpayers in Illinois should look to Indiana’s experience as a cautionary tale. Repeal of prevailing wage has had negative consequences for Indiana. Wages have been slashed, inequality has increased, and the skills shortage has worsened– all without increasing competition or saving a penny.

With all of this in mind, the Illinois Prevailing Wage Act is good for workers, businesses, and families. Illinois’ prevailing wage law stabilizes take-home pay and benefits for construction workers, creates a level playing field for contractors, and boosts the economy. Prevailing wage encourages high standards of safety and productivity, provides ladders of access into the middle class, and is the best value for taxpayers. I thank you for allowing me the opportunity to submit my testimony.


 

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Bruno on the Illinois Prevailing Wage Act

Please CLICK HERE to read a full version of Bruno’s testimony.

Good afternoon, Chairman Hoffman, Vice Chair Jones, Spokeswoman Ives, and Members of the Committee. My name is Robert Bruno and I am a Professor of Labor and Employment Relations in the School of Labor and Employment Relations at the University of Illinois. I also serve as Director of the Labor Education Program and Director of the Project for Middle Class Renewal.

Enacted in 1941, the Illinois Prevailing Wage Act is a law that supports blue-collar construction workers employed on public projects. Prevailing wages are essentially minimum wages for each trade on public projects. Illinois law requires that certified payrolls be submitted each month to the public body in charge of a project. The Illinois Prevailing Wage Act levels the playing field for all contractors by ensuring that state and local expenditures maintain and reflect local area standards for wages and benefits.

Prevailing wage is a partial solution to a problem caused by the low-bid model: contractors aiming to lower their bids through cutthroat reductions in wages, benefits, and apprenticeship training. By taking labor costs out of the equation, prevailing wage incentivizes construction contractors to compete on the basis of efficiency and core competencies, rather than on undermining middle-class compensation standards. Therefore, under the Illinois Prevailing Wage Act, low bids are the result of a combination of superior management practices, labor, and logistics.

A review of the prevailing wage literature reveals mostly conclusive scholarly research. Common results tend to show that repeals are associated with negative labor market outcomes for workers. Depending on the study, repeal has been found to reduce construction incomes by as little as 3 percent and as much as 17 percent. Various studies across the Midwest have shown that repeal of state prevailing wage laws would reduce total construction labor income by hundreds of millions of dollars.

Repeal is also associated with less work for local contractors. The share of construction work completed by out-of-state contractors is 2 percent higher in states that do not have prevailing wage. Additional research has shown that local contractors are 5 percent less likely to win bids on public school projects in states that do not have prevailing wage.

Because repeal reduces incomes for construction workers and reduces work for local contractors, repeal has a negative impact on public budgets. Research has shown that the absence of state prevailing wage laws reduces income tax and property tax revenues by 17 percent while increasing the number of workers who qualify for public assistance programs, such as food stamps. Conversely, the preponderance of the research indicates that prevailing wage laws do not have a noticeable effect on public construction costs. Ultimately, repeal reduces tax revenue collections while increasing public expenditures.

In October 2013, I co-authored a report with two University of Illinois researchers and Professor Dale Belman of Michigan State University. The study was the first comprehensive examination of the economic and social impacts of the Illinois Prevailing Wage Act, and provided a forecast of the effect of a hypothetical repeal of the law. The study was grounded in years of prior academic research on the effects of repealing prevailing wage laws.

We found that repeal of Illinois’ prevailing wage law would have negative effects on the state. The study forecast that lower construction wages would reduce consumer demand, causing a net loss of about 3,300 jobs. The drop in wages and the rise in out-of-state contractors would shrink the Illinois economy by more than $1 billion annually and result in more than $44 million in lost state and local tax revenue.

Detrimental social impacts would also accompany repeal. States with prevailing wage laws have a lower construction worker fatality rate than states without prevailing wage laws. This is, in part, because states with prevailing wage laws have a much higher share of apprentices in the construction workforce. Given these facts, we estimated that an additional 70 construction workers would lose their lives over a decade if prevailing wage is repealed and apprenticeship programs are weakened in Illinois. We also found no evidence that repeal would be beneficial to any particular demographic group.

Prevailing wages for public construction projects in Illinois provide numerous positive economic and social impacts for the state. Our research has predicted that repeal of the Illinois Prevailing Wage Act would not result in savings for taxpayers. Rather, repeal would result in a decline in training opportunities, an increase in construction worker fatalities, and job losses in Illinois. Repeal of prevailing wage should be rejected as a policy tool because it is grounded in a view of the Illinois economy that depends on reducing the incomes of workers.


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Duncan on the Effect of Prevailing Wage on Construction Costs

Please CLICK HERE to read a full version of Duncan’s testimony.

Good afternoon. Thank you for allowing me to submit my testimony into record. My name is Kevin Duncan and I am a Professor of Economics at the Hasan School of Business at Colorado State University–Pueblo. My research on construction labor market policy has informed public policy in 20 states.

Among policymakers and researchers, the predominant interest in prevailing wage laws has been in understanding their effect on public construction costs. The most common public argument supporting the repeal of existing prevailing wage laws has been that doing so will save taxpayer dollars.

Studies that conclude that prevailing wage increases construction costs typically rely on a simplistic empirical approach that produces biased estimates, called the “wage differential” method. Rather than use actual contractor bids to measure the cost impact, this approach multiplies the prevailing wage premium by the labor cost share of total construction costs– typically between 20 and 25 percent.

However, studies relying on the wage differential approach suffer from methodological defects. For example, this method rules out the potential cost offsets attributable to contractors hiring more skilled workers or substituting capital for more expensive labor. Another example is that material costs have been found to be lower in states with prevailing wage laws. As a result, the wage differential method produces inaccurate cost estimates based on an incomplete understanding of construction markets.

By contrast, the most advanced studies published in recent years do not support the hypothesis that prevailing wages increase public construction costs. These studies are based on the statistical analysis of hundreds and even thousands of contractor bids submitted under competitive market conditions. Seven out of eight rigorous analyses using the preferred method of economists—regression—fail to find statistically significant evidence that prevailing wage laws have any effect on school construction costs. Results also indicate that the wage policy does not affect the level of bid competition.

Drawing on both the peer-reviewed research and actual economic data, Frank Manzo IV and I recently assessed the impact of Indiana repealing its prevailing wage law– called the Common Construction Wage Act– in January 2018. We analyzed 903 total bids on 335 school construction projects in 14 northern Indiana counties between January 2013 and September 2017 and found that repeal had no effect on the cost per public school project. Additionally, there was no statistical difference in the share of school construction projects won by union contractors due to repeal of prevailing wage. These findings parallel the economic consensus on the cost effect of prevailing wage laws.

Time and again, studies investigating the aftermath of repealing state prevailing wage laws have found that repeal does not save taxpayer dollars but does weaken the construction industry. Lawmakers in Illinois would do well to consider the effects of repeals in other states– including neighboring Indiana– along with the bulk of peer-reviewed economic research. More often than not, the promises made by those in favor of repealing prevailing wage fail to be delivered after the fact.


For additional ILEPI studies on prevailing wage since 2013, please Click Here.

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