In our last newsletter we explored the history of Federal and State prevailing wage law. In this issue we’ll focus on the fiscal impact, along with some interesting facts and figures specific to California.
California’s prevailing wage law, first enacted in 1931, requires that workers on every state, local, and government public works project (with a contract cost of more than $1,000) be paid the prevailing rate of per-diem wages for work of similar character in the locality of the project.
A provision enacted in 1953 requires the Director of the State Department of Industrial Relations to consider rates established by collective bargaining agreements, including data from unions, employer associations, and rates determined for federal public works (Davis-Bacon), in determining the prevailing rates.
In 1993 Assemblyman Jan Goldsmith, who previously had served as mayor of Poway, introduced bills to either repeal or drastically change prevailing wage requirements. These bills were killed in the Policy Committees of the state Assembly and Senate. Goldsmith had also sought a prevailing wage exemption ordinance for the City of Poway, similar to the exemption Pete Wilson obtained for the City of San Diego when he was Mayor.
Between January and April 1995, 10 new bills to change prevailing wages were introduced. The Wilson administration recommended changes to prevailing wages, and backed up its recommendation by sponsoring AB 138, also written by Assemblyman Goldsmith, which would have changed the rate determination method to a weighted average, and which would have allowed local governments to opt out of the prevailing wage requirement. AB 138 and related proposals again died under review by the Assembly and Senate policy committees.
Prevailing Wages and their Impact
There have been dozens of studies on the impact of prevailing wages. Studies funded by unions and publicly-funded educational institutions tend to find that a prevailing wage requirement has little or no impact on building costs. (Kelsay, Michael, Wray, and Pinkham, 2004, "The Adverse Economic Impact From the Repeal of the Prevailing Wage Law in Missouri". Working Paper, Department of Economics, University of Missouri.)
Conversely, studies funded by private organizations and non-union contractor associations find the impact to be as high as 26 to 38 percent. One such study of 205 low-income housing projects in the State of California concluded prevailing wages increased construction costs by at least 9% and as much as 37%. (Dunn, Quigley, & Rosenthal (2005) "The Effect of Prevailing Wage Requirements on the Cost of Low-Income Housing." Industrial and Labor Relations Review 59 (1):141-57)
Based on our experience specific to local affordable housing projects, we’ve found the impact to range from 16 to 25 percent, depending on the nature of the project. Less than one year ago a simple two-story apartment project was priced both with and without prevailing wages, and the result was a difference of 16 percent. More recent projects seem to have felt less impact, perhaps due to the nature of the economy and increased competition.
Commercial projects tend to have higher deltas due to the difference in prevailing wage rates for commercial versus residential projects. Interestingly, under prevailing wage law, many workers on a relatively complex, three-story, 200-unit apartment project will earn lower wages than that would workers on a 3000 square-foot, single-story government office building. For some trades there are no reduced residential rates, and for these trades commercial rates apply to all building types.
The impact of prevailing wages extends well beyond the higher wages paid to workers. The added administrative expense of reporting and monitoring alone adds cost at every level, including project developers.
Prevailing Wage Rates
For purposes of this article we gathered 2009-2010 hourly wage rates applicable to projects in San Diego County. Some of these rates apply only to a specific county, and some to larger regions (such as southern California). Below is a sampling of Journeyman rates for a few trades.
(We threw this one in just for fun – we obviously don’t encounter this in residential construction.)
The above rates do not include employer contributions to FICA, FUTA, SUI, or workers’ compensation insurance. These employer contributions will typically add 18% to 25% or more.
As a comparison, an average tenured teacher’s salary in one North San Diego County school district is approximately $81,000.00 for the nine-month school year, including benefits and the employer’s contributions.
The foregoing is simply a brief overview, and only begins to touch on the complexity of prevailing wages, their administration, and the impact on construction costs. Sun Country Builders has years of experience administrating prevailing wage work -- if you have any questions or comments, please contact us directly.
