It’s been three years since the American Recovery and Reinvestment Act was signed into law. Only 7% of the $840 billion in stimulus funds were allocated to transportation and infrastructure projects. White House Budget Chief of Staff Jack Lew recently said that a “crumbling infrastructure is not the way to build an economy that can last.” The Obama Administration has proposed spending hundreds of billions of additional dollars on roads, bridges and schools. Common sense says that the Federal government should undertake those infrastructure projects where the benefits exceed the costs. Unfortunately the Davis-Bacon Act inflates costs by requiring Federal contractors to pay the prevailing wage (plus fringe benefits) on construction projects.
Government infrastructure spending makes sense because borrowing costs are low; the 10 year Treasury bond rate is about 2%. This argument would be bolstered if labor costs were also relatively low. The Davis-Bacon Act, however, forces government contractors to pay artificially high wages and benefits. This means that fewer projects will be completed for each billion dollars budgeted for infrastructure.
If the wages paid on government construction projects could freely adjust to market conditions, labor costs would be much lower in many parts of the U.S. The following figure shows construction employment in three states particularly hard hit by the 2008 recession: Florida, Michigan, and Nevada. Construction employment is down 40% to 62% from its pre-recession peak in these states.
The large demand reductions in the Florida, Michigan and Nevada construction industries put downward pressure on construction wages. Davis-Bacon prevents this from lowering labor costs for Federal projects. The U.S. Department of Labor sets the prevailing wage in each area based on surveys of unions and employers that are administered by its Wage and Hours Division (not the Bureau of Labor Statistics).
The 2012 prevailing wage in Las Vegas (Clark County) is about $50 per hour for carpenters and $60 per hour for electricians and power equipment operators. I presume there are thousands of unemployed and underemployed construction workers in Las Vegas who would be willing to work for less than $50 per hour.
Prevailing wages that are unresponsive to current labor market conditions are not limited to Las Vegas. The following figures show prevailing wages for plumbers and elevator mechanics in Wayne County, Michigan (Detroit) and Broward County, Florida in 2004 and 2012. Since 2004, the prevailing wages of elevator mechanics increased by about 80% in Wayne County and by 90% in Broward County. Over the past 8 years, plumbers’ wages increased by 40% in Broward County and by 67% in Wayne County. These substantial increases occurred despite the collapse of the construction industries in Michigan and South Florida in the past decade.
The Works Progress Administration (WPA) had a much different approach for infrastructure projects from 1935 to 1943. WPA wages were twice welfare benefits, but far less than the union pay scale, so that more workers could be employed. The WPA also used excessively labor intensive methods to increase employment per project.
Inflated infrastructure costs are undesirable whether they are due to artificially high wages or an inefficient production process. Ultra-Keynesians, like Paul Krugman, may advocate infrastructure spending as a stimulus even if production is inefficient or labor costs are inflated. After all, Krugman recently argued that government spending for protection from imaginary space aliens would be beneficial.
The Federal government should undertake infrastructure projects where benefits exceed costs, allocate resources efficiently, and pay market wages. The projected benefits of infrastructure projects should be based on the merits of each project not supposed stimulus effects. Project costs should reflect market conditions. Requiring contractors to pay their employees inflated prevailing wages produces no more stimulus than would a requirement that domestic bondholders receive 5% rather than 2% interest. Davis-Bacon prevailing wage requirements were suspended in the aftermath of Hurricane Katrina. The Obama Administration should consider suspending Davis-Bacon again so that contractor wages reflect market conditions, more unemployed construction workers can be hired and more worthwhile infrastructure projects can be funded.