NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effects of Repealing Prevailing Wage Laws

"Repeal leads to a decline of approximately 10 percentage points in the long-run union wage premium earned by construction workers ... but does not appear to lower the wages of black construction workers."

Most states have "prevailing wage laws" which require private contractors bidding for state or local public works projects, or private projects that are financed in part by public funds, to pay a minimum package of wages and benefits to their workers. Although details of the laws differ from state to state, the effects of these laws on construction labor costs, and on construction labor markets more generally, have been the focus of an extensive policy debate.

In Prevailing Wage Laws and Construction Labor Markets (NBER Working Paper No. 7454), NBER Research Associates Daniel Kessler and Lawrence Katz examine the consequences of several states' repeal in the 1970s and 1980s of their prevailing wage laws. By comparing trends in construction labor markets in "repeal" states to trends in labor markets in states that did not change their laws, they find that the average wages of construction workers (in repeal states) decline slightly after repeal -- by about 2 to 4 percent.

However, they also find that the small overall impact of law repeal masks substantial differences in outcomes for different groups of construction workers. The negative effects of repeal on wages are borne primarily by unionized and by white workers. First, repeal leads to a decline of approximately 10 percentage points in the long-run union wage premium earned by construction workers, or almost half of the total union wage premium in construction. Since union members account for approximately 25 percent of all construction workers, the 10-percentage-point decrease in the union wage premium explains almost all of the (approximately 2 to 4 percent) decline in construction workers' wages.

Second, despite the negative overall effects of repeal on the wages of construction workers, the repeal of prevailing wage laws does not appear to lower the wages of black construction workers. According to the authors' estimates from census data, prevailing wage law repeal actually raises the construction industry wage premium for black workers by approximately 4 percentage points relative to other workers.

The implications of these findings, and their applicability to other states considering repeal of their prevailing wage laws, depend crucially on the mechanism causing the differential impact of repeal across groups. The differential impact of repeal by race and union status may reflect a decrease in discrimination caused by a weakening of construction unions, or a change in union behavior arising out of a declining union wage premium. On the other hand, if repeal affects workers in heavy construction (for example, road and sewer construction) more than workers in light construction, and if heavy construction workers are more likely to be white and unionized, then the differential impact of repeal by race and union status may simply reflect the differential composition of workers in the two segments of the construction industry.

Unfortunately, as Kessler and Katz point out, they cannot distinguish definitively between these two possibilities based on the information collected by either the census or the Current Population Survey. They conclude their analysis with some possible ways that future research might investigate the mechanism through which prevailing wage laws affect wage schedules.

-- David R. Francis


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