Professor Robert Frank argues for more government spending on infrastructure in an opinion piece in the New York Times. Frank writes that both Mitt Romney and President Obama should be “willing to take the one politically feasible step that could help mend the economy quickly: an accelerated program of infrastructure repairs.” Frank’s column is quite similar to one written in October 2011 by informal Obama advisor Richard Thaler, who wrote that infrastructure investments are “on sale” because of low interest rates. Frank seconds this argument by writing “many skilled people who can do these jobs are unemployed today. If we wait, we’ll have to bid them away from other useful work. And with much of the world still in a downturn, the required materials are cheap.”
The problem, as I noted in an earlier blog post, is that labor costs for government construction projects are dictated by the Davis Bacon Act and not by competitive labor market conditions. The Davis Bacon Act states:
every contract in excess of $2,000, to which the Federal Government or the District of Columbia is a party, for construction, alteration, or repair, including painting and decorating, of public buildings and public works … and which requires or involves the employment of mechanics or laborers shall contain a provision stating the minimum wages to be paid various classes of laborers and mechanics.
minimum wages shall be based on the wages the Secretary of Labor determines to be prevailing for the corresponding classes of laborers and mechanics employed on projects of a character similar to the contract work in the civil subdivision of the State in which the work is to be performed . . .
The prevailing wages set by the Secretary of Labor are generally substantially higher than the median wage in BLS surveys, even in areas where the construction industry has been decimated by the recession. The following chart shows the change in construction employment in four counties especially hard hit by the recession.
One would expect that construction workers would be willing and able to work on infrastructure projects for relatively low rates of pay in these counties. In Clark County, Nevada, for example. construction employment fell by more than one half. Unfortunately the prevailing wages set by the Secretary of Labor for heavy construction projects in Clark County do not reflect the slack in the labor market:
- Flagperson $41.44 per hour
- Carpenter $45.11 per hour
- Structural Ironworker $56.74 per hour
- Crane Operator $66.75 per hour
These hourly wages are, on average, about 12.8% higher than they were in 2007 when the construction sector in Las Vegas and Clark County was booming. The prevailing wages in Riverside, Maricopa and Miami-Dade counties are similarly high and have also increased over the past few years even though the demand for construction labor has plummeted.
Government infrastructure projects are expensive because prevailing wages are above the market wages measured by the Bureau of Labor Statistics. High labor costs make infrastructure projects much less of a bargain than Professors Thaler and Frank have argued.
What can President Obama do? He can suspend the Davis Bacon Act until the economy, especially the housing market and construction sector, has recovered. Suspension of the Davis Bacon Act is not without precedent in the case of a national emergency. President George W. Bush suspended Davis-Bacon in Alabama, Florida, Louisiana and Mississippi in the fall of 2005 as the region recovered from Hurricane Katrina.
Mr. President, we face an emergency in the construction sector. Housing prices have not recovered from the recession and employment in the construction sector is far below its pre-recession levels. Professors Frank and Thaler are correct – it makes sense to invest in infrastructure projects when they are “on sale.” The Davis Bacon Act stands in the way of getting important construction projects completed at a reasonable cost to taxpayers. In addition, a bold move like suspending Davis Bacon could encourage Republicans in Congress to support other job initiatives that you favor.