Reihan Salam has a smart piece in National Review Online and provides some good insights about how the construction sector is changing and why construction employment has not rebounded as it has in prior recoveries. He notes that modular construction and technological change is likely to change the labor intensity of construction projects. So even when construction activity rebounds, construction employment may never regain the share of total employment it reached during the housing boom of a decade ago. Salam is correct; trends in construction employment may begin to look a bit more like manufacturing. In U.S. manufacturing it has been quite common to see output increase despite stagnant or even declining employment because of technological change.
Salam writes that construction projects in the U.S are often inefficient and I agree, especially when it comes to infrastructure investments. The federal regulations make public sector projects far too expensive to taxpayers even at a time when a record downturn in construction employment should mean much lower costs. The federal government has not taken enough advantage of the considerable slack in construction employment to build and repair infrastructure.
By law, federal government projects must pay the prevailing wages of construction workers, and these wages are often union scale. This regulation, known as the Davis Bacon Act, has artificially inflated the price of construction labor on public sector projects. Even in states and counties where construction employment has been depressed for the past five years, government contractors are sometimes required to pay wages in construction trades that exceed the average in the area by at least $10 per hour.
Davis Bacon wages do not rely on carefully designed samples of workers, such as the Bureau of Labor Statistics (BLS) Occupation Employment Statistics (OES) Survey to determine the wage distribution in construction trades in a local area. Instead, Davis Bacon wages are determined in the Labor Department’s Wage and Hour Division which over-samples unions and obtains much higher construction wage estimates. Only 6.6% of private sector workers are union members so the special treatment of unions in Wage and Hour Division surveys leads to unrepresentative prevailing wage estimates.
As an example consider Riverside County, California where the unemployment rate in July was 11.1%. The most recent OES survey reports that the average wage for a carpenter is $27.25 per hour and 75% of carpenters earn $36.39 per hour or less in Riverside. Yet the Davis Bacon Act mandates that federal contractors pay at least $48.43 per hour to carpenters in Riverside, in wages plus fringe benefits, on government construction projects. The Davis Bacon prevailing wage for carpenters is $37.35 per hour and prevailing fringe benefits are $11.08 per hour. (The BLS National Compensation Survey reports that the average cost of fringe benefits is $10.52 per hour nationwide.) Similarly inflated compensation is required for brick masons, electricians, plumbers and equipment operators.
Although reasonable economists can disagree about the level of public spending on infrastructure, ideally we should make more public investments in infrastructure during a downturn when opportunity costs are lower. The Davis Bacon Act interferes with such a common sense policy. Conservatives should have proposed a repeal of Davis Bacon in the waning months of the Bush Administration or early in the Obama Administration as a way to more efficiently utilize slack resources during the recession.
Requiring taxpayers to pay inflated prices to construction labor makes as much sense as paying inflated interest rates to government bondholders even though market interest rates have declined. The federal government currently pays lower interest rates on government debt because it pays market rates on new debt issues. Fortunately there is no equivalent to the Davis Bacon Act requiring that the federal government pay inflated non-market interest rates to protect retirees and pension funds that hold government bonds. It is time to change the law so that taxpayers can also pay market wages on construction projects.