Prevailing Wage Laws: Public Interest or Special Interest Legislation?
Leef, George C., The Cato Journal
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.
--Adam Smith (1776)
The public policy of the United States is broadly in favor of competition. Our antitrust laws are premised on the idea that in the absence of such legislation private interests would seek to create monopolies, fix prices, restrain trade, and stifle competition. Moreover, the federal government, as well as the states and municipalities, has laws mandating competitive bidding on government contracts to guard the public against "sweetheart deals" that squander tax dollars. Open competition, in fact, is usually the undoing of those conspiracies against the public that Adam Smith saw as so prevalent.
One glaring exception to the general rule favoring competition is "prevailing wage" laws. Those laws mandate that on government construction projects, the labor component will not be subject to competitive bidding; rather, the wages paid to the various classes of construction labor are set by government officials at rates determined to prevail in the job site's locality--typically, prevailing union wages. Labor wages and benefits are thus removed from competition by operation of law.
Are prevailing wage laws a reasonable deviation from our general rule in favor of competition? Do they actually reflect the public interest, with benefits that outweigh the costs? Or are they merely an instance of rent seeking by a politically potent interest group, using its influence to use the law to enforce a price fixing scheme? This article concludes that the latter of those questions captures the truth. Prevailing wage laws favor special interests by concentrating benefits and dispersing costs. They ought to be repealed.
The Davis-Bacon Act
Enacted in 1931, the Davis-Bacon Act (40 U.S. Code [section] 276) is the federal prevailing wage statute, requiring that contractors on federal construction projects must pay at least the wages and benefits found to be "prevailing for the corresponding classes of labors and mechanics" employed. The statutory language does not specify how this determination is to be made, leaving that to the Secretary of Labor. The "prevailing" rates do not necessarily have to be those of construction unions, but often they are. The Labor Department's method for determining "prevailing" rates has been widely criticized for giving far too little weight to lower, nonunion rates that many construction workers in the area receive. Glassman et al. (2008: 38), for example, conclude that the wage survey method in use "employs unrepresentative survey and measurement methods that produce wages estimates that are biased upward." Precisely how the government sets the rates, however, is much less important than the fact that contractors are forbidden to pay workers less even if their workers would accept a lower rate. The devil here is not in the details, but in the concept.
The genesis of the Davis-Bacon Act (named for its sponsors, Pennsylvania Senator James Davis and New York Representative Robert Bacon, both Republicans) was the construction of a Veterans Bureau Hospital on Long Island in 1927. The contractor who won the bid was from Alabama and employed many black workers. Representative Bacon was bothered that construction workers in his district had lost out on the job and he introduced a bill that would prevent the use of migrant labor on federal projects. The bill did not pass in that session, but he kept reintroducing it.
In 1930, with the nation's economic depression deepening rapidly, Bacon's bill found strong support in the House and Senate. The hearings and debate on the legislation revealed some ugly racial overtones with comments on how "cheap colored labor" was driving down wages of white workers (Bernstein: 1993). …