The sign at the entrance reads: “Public Daycare Center.” There is a new porch, fresh pavement, and bright windows. Inside, there is a playroom, a kitchen, and warm floors. Everything seems fine. But the budget hides another story that rarely makes the headlines. For example, the contract to lay the tiles cost the treasury 20% more than a similar private project across the street. The reason is a prevailing wage law.
At first glance, the idea seems humane. The state sets a minimum wage for construction projects financed from the budget. Contractors are required to pay workers a “prevailing” wage, which is supposed to correspond to the market norm in the region. In practice, however, this means one thing: artificially inflated prices. In other words, taxpayers’ money pays wages higher than the real market value.
Such laws are in force at the federal level and in most US states. In Pennsylvania, for example, they apply to projects of all levels, from school gyms to bridges on county roads. This is about protecting workers. But the more we learn about these regulations, the clearer it becomes that it is not workers who benefit, but certain groups of contractors and their allies. And everyone else pays for it.
Good Intentions Lead to Higher Prices
Historically, prevailing wage laws emerged during the Great Depression. In 1931, the Davis-Bacon Act was passed, requiring contractors working on government construction projects to pay no less than the established wage. Under the slogan “equal opportunity for all,” the idea was promoted that local workers deserved protection from “cheap” competition. But even then, other motives were being voiced behind the scenes in Congress: fear of an influx of African American migrants from the South who were willing to work for less money.
The law quickly became a tool for special interests: large unions gained a monopoly on participation in tenders, while small and independent contractors were squeezed out. The model spread across the country. More than thirty states adopted so-called “Davis-Bacon small laws.” The result was an increase in budget expenditures and a decrease in competition.
What the figures show
A report by the Allegheny Policy Institute shows how this works in Pennsylvania. In 1999, the state spent $2.12 billion on construction. If the prevailing wage law had not been in place, at least $212 million could have been saved. That equals 2.4 percent of all individual income tax collected that year.
Municipalities spent an additional $3.48 billion. Without the obligation to pay inflated rates, the savings could have been $348 million, nearly four percent of property taxes.
The situation is even more striking in school construction. In 1998, 66 school projects worth more than $730 million were funded in Pennsylvania. By abandoning artificially high rates, more than $73 million could have been saved on these projects alone. At the same time, the quality of the work remains the same, as studies from other states show.
Distorted Competition
Let’s imagine two contractors. One is a large company with close ties to labor unions. It can access tools, trusted representatives, and internal channels for calculating rates. The other is a small construction firm focused on efficiency and flexibility. Under normal circumstances, both would participate in tenders, competing on price and quality. But with a prevailing wage law in place, the equation changes. The state does not simply set a “threshold”; it dictates conditions one player can meet but others cannot.
First, the rate is determined not by the market but by collective agreements between large contractors and trade unions. Second, a fixed package of social benefits is added to wages, which means an increase in the tax burden for small companies. Finally, the certification, reporting, and auditing procedures themselves require resources that small contractors do not have.
As a result, the number of applications falls, competition decreases, and costs rise. This is a direct mechanism for transforming the market into a closed system. Those who cannot fit into this model leave the game. And those who remain are no longer eager to lower prices because the rules protect them.
What Other States Show
A federal court ruling suspended the prevailing wage law in Michigan for 30 months. This allowed researchers to compare periods with and without the law in effect. Without it, employment growth in construction accelerated by almost 4.5 times. The number of new jobs increased from 4,000 to 17,600 per year. Even when weather and seasonal factors were considered, the effect remained.
Significant differences were also observed in Ohio, where schools were exempted from the law for a specific period. About 81 percent of school districts waived the requirement to pay prevailing wages. The result was: an average savings of more than 10 percent, with no change in construction quality. The difference between rural and urban districts is fascinating: savings reached 14.4 percent in rural areas. The reason is simple: in such regions, market rates are significantly lower than “imported” union standards.
In Oregon, a labor market survey was conducted for the first time in 1995 to compare actual wages with union wages. The difference was as high as 41 percent. Moreover, the main discrepancy arose in the area of social benefits: union structures are financed from special tax-exempt funds, while small businesses are paid in cash and are subject to taxation. Consequently, the gap is not only persisting; it is growing.
Who Loses?
The law on prevailing wages is presented as a tool for protecting labor. But absolute protection is not going to those who need it most. Among the consequences are:
- Budget redistribution in favor of selected contractors.
- A decline in the number of new jobs in construction.
- Exclusion of small and independent players from the public procurement system.
- Increased tax burden on citizens.
- Closing access to projects for representatives of vulnerable groups, primarily unskilled workers and entrepreneurs without connections to trade unions.
Historically, the law arose in the context of discrimination. One of the congressmen who supported the Davis-Bacon Act stated explicitly that its purpose was to protect against “cheap colored labor.” Ninety years later, this legacy is evident in how the system works: access to it is not open to everyone, and this is no longer just a question of economics, but also of justice.
What Can Be Changed?
At the federal level, the Congressional Budget Office has already recommended repealing the law or raising the threshold from $2,000 to $1 million. This would save more than $9 billion over 10 years. However, reform at the federal level is slow and politically complex.
A much more realistic path is to change the rules at the state level. Florida, Ohio, Michigan, and others have already tried options ranging from repealing the law to partially exempting specific categories of projects from its provisions. Exempting school districts has been particularly effective. Reducing costs directly affects the ability to build more, faster, and better.
Conclusion
If the state wants to be a rational buyer, it must select contractors based on efficiency criteria, not on their proximity to the union system. Prevailing wage laws work against the goal of creating more jobs, especially for entry-level workers and members of vulnerable groups. If we are looking for budget savings, they exist and have already been proven.
Whether elected representatives abandon old agreements for the public interest, because of prevailing wage laws, society pays twice: with money and lost opportunities.