Imagine you wanted to have your house painted, remodeled, or even have a new house built, but all the contractors had agreed to charge the same prices. What if your local government passed a law requiring you to pay the same price no matter which contractor you chose? Sound like a good idea?
For over 100 years, US antitrust law has prohibited sellers from conspiring to fix prices. According to the US Federal Trade Commission’s “Guide to Antitrust Laws” price fixing is defined as:
“…an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.”
Compare that first line to the following language:
“…a wage of no less than the … wages for work of a similar character in the locality in which the work is performed shall be paid to all workmen employed…”
One might think that sounds like an agreement to “stabilize prices or competitive terms” for labor services. But in fact, it’s an excerpt from Missouri Revised Statutes Section 290.220, otherwise known as the Prevailing Wage Law, which reads:
“It is hereby declared to be the policy of the state of Missouri that a wage of no less than the prevailing hourly rate of wages for work of a similar character in the locality in which the work is performed shall be paid to all workmen employed by or on behalf of any public body engaged in public works exclusive of maintenance work.”
The effect of the prevailing wage law is to require all public construction projects, from State to local school districts, from new building construction to repainting existing buildings, to pay workers a wage determined by the Missouri Department of Labor as being the ‘prevailing wage’ for the specific type of work in that local area. From a practical perspective, the prevailing wage law amounts to little more than a legalized form of price fixing, facilitated by the State.
Proponents of the law–particularly labor unions and contractors that hire union workers–argue the law helps ensure higher quality work because it eliminates contractors’ incentive to hire lower skilled labor. Critics argue that the law does nothing but protect union interests by eliminating competition in the labor market, and increases the cost to tax payers of all public construction projects. (Some critics would add that the law infringes on individuals’ freedom to contract).
Empirical research on the effect of prevailing wage laws is mixed. Some researchers find that prevailing wage laws increase the cost of public works projects by anywhere from 9 to 30%. Other researchers have found that even though the cost of public projects is significantly higher in prevailing wage states, those differences are negligible when other factors are controlled for.
However, what does not seem to get much attention in the empirical literature is how the prevailing wage is determined, and how that process itself may affect the cost of construction projects in both the private and public sectors due to the incentives the process creates.
At least in Missouri, the Annual Wage Order is based on wage information voluntarily reported by contractors. Contractors are “heavily encouraged” to submit wage reports for any commercial construction projects. Only contractors that participate in public contract bidding have incentive to submit wage reports since they are the only ones with an interest in the established wage. This incentive to report may inflate the prevailing wage calculation because companies that specialize in private commercial construction may pay lower wages in attempt to be more competitive.
Because accepting a public contract would require paying (higher) “prevailing wages”, contractors whose business is primarily private commercial construction may have even less incentive to participate in public project bidding. Contractors may find it difficult to pay their workers more for some projects than for others. Accepting public contracts may put the contractor in a position of being less competitive in the private construction market, since it would not be able to lower wages for those projects. The end result? Only higher wage contractors participate in public bidding and report their wages to the Department of Labor, further skewing the “prevailing wage”.
To the extent contractors participate in both public and private construction projects and do manage to pay different wage rates, contractors still can be selective in which wages they report to the Department of Labor. Contractors can submit wages for their public contracts and their more generous private commercial contracts and withhold information about any lower-wage contracts.
This endogenous wage-setting problem is even more likely in the case of construction projects that are uniquely public in nature. Almost all road construction in the US is done by public entities. Companies that specialize in road construction are the only firms submitting wage reports that determine the prevailing wage for road construction work. As a result, there is absolutely no competitive check on the potential escalation of wages for such projects.
There are some testable hypotheses implied by the arguments above. One would be the degree of specialization in public versus private construction projects by contractors. Another would involve the trend or serial correlation of prevailing wages for construction projects that are uniquely public in nature versus construction projects that have a mix of public and private buyers. And if one were able to get the data, a third would be to test whether the types of projects for which wages are reported to the Department of Labor are systematically biased in a way that would result in biased estimates of the ‘prevailing wage’.
Private firms that engage in price fixing, even by tacit collusion (that is, by informally following one another’s lead) are subject to fairly strict antitrust prohibitions. State prevailing wage laws, especially ones that are based on selective, voluntary reporting, amount to little more than a legalized form of State-sponsored price fixing. It’s worth thinking about why price fixing should be illegal when individuals pay for things themselves, but not when politicians and bureaucrats use taxpayers’ money to buy things for them.