November 4, 2005

November 4, 2005 | WebMemo on Jobs, Jobs and Labor Policy

The Heresy of Labor Markets: Congress Clamors to Reinstate Davis-Bacon

The Davis-Bacon Act is a 1931 law based on depression-era economics that is unlikely to do more than shore up the unionized share of government construction contracts at taxpayer expense. President George W. Bush surprised observers after Hurricane Katrina with the bold action of suspending Davis-Bacon rules in areas affected by the Hurricane (as the law allows during time of national emergency). Unfortunately, vocal opposition from some Republican Members of Congress led to an Administration retreat and reinstatement of the rules in the Gulf Coast region on November 8.


What is the Davis-Bacon Act and why is it important? A leading textbook explains it this way:


[U]nions often attempt to raise the price of other inputs, particularly nonunion labor. For example, the Davis-Bacon Act requires that contractors involved in publicly financed projects pay the 'prevailing wage' to construction workers. Not surprisingly, the prevailing wage is typically defined as the union wage, even if the contractor hires nonunion labor. This type of regulation raises the costs of switching from union labor to other inputs.[1]


In other words, prevailing wage rules makes government more expensive. Davis-Bacon and its twin, the McNamara-O'Hara Service Contract Act of 1965, work to protect union labor from more competitive non-union labor, which in the Gulf Coast translates into less reconstruction for the same tax dollars, fewer homes repaired, and lower-priority projects being canceled.


More fundamentally, these types of laws fall under the heading of price controls, the bricks and mortars of planned economies. Governments in socialist states are responsible for setting wages and prices, rather than allowing the market to establish equilibrium wages and prices. This principle is embedded in the U.S. Department of Labor's Wage and Hour Division, which, for example, published "General Decision LA20030052" on September 30 of this year establishing prevailing wages for Orleans, Ouachita, Plaquemines, and a handful of other parishes in Louisiana. The decision fixes wages for a High-speed Millwright at $20.92, with fringe benefits at $3.33, whereas Maintenance Millwrights rate only $20.37 with the same fringe benefits. Thousands of other finely detailed occupations (e.g., Piledrivermen, Cable Splicer, Steamfitter, Wobble Wheel Tractor Driver) are similarly described, and the U.S. is barred from contracting at any lower wage or using a subcontractor who would pay a penny less. Indeed, the federal government publishes wages for every county in every state and every type of construction job ona searchable website.


The premise underlying Davis-Bacon is that markets are ineffective at setting fair wages. This would not earn a passing grade if submitted as an answer to a contemporary Economics 101 exam. Why then is it the basis for a government law today?


There are an infinite number of things that the central government should not waste its time measuring and enforcing. What's the prevailing color for file folders? What's the prevailing button strength for Senator's shirts? What's the prevailing price for all the different breakfasts and lunches that government employees consume? According to the logic of exploitation, FEMA officials would maliciously attempt to pay below-prevailing prices for lunches at local restaurants in New Orleans unless Congress authorizes and fully funds a Culinary Price Division in the Commerce Department. If the logic of restauranteur-protection fails the laugh test, why does Davis-Bacon pass it?


Davis-Bacon's effects on reconstruction are even more pernicious than just raising prices. The regulations in place to enforce the law are especially onerous, adding weeks or months of delay to projects. Worse, Davis-Bacon effectively discriminates against small employers which do not have the back-office lawyers to navigate the paperwork required. Reinstating Davis-Bacon locks out many local and minority-owned firms in favor of the big multinationals. It shrinks the available workforce, too, requiring all kinds of worker certifications and accompanying paperwork that often only unions are able to provide. The result is that unemployed local residents, eager to rebuild their communities, are barred from even basic positions, such as debris removal. It is no wonder that the unions support Davis-Bacon so strongly, though one might question their commitment to the men and women in Louisiana and Mississippi. 


One hopes that the sudden rise, and more sudden demise, of a truly free market for construction work is an opportunity for a renewed discussion on repealing prevailing wage laws outright. Davis-Bacon may have been "saved" in the short term, but Americans will be watching the expenses of the federalization of Gulf Coast reconstruction closely. Budget deficits are forcing Congress to reassess its priorities, and inefficient rules deserve to be the first to go, even if this means admitting some old laws were wrong to begin with. Even the Catholic Church eventually relented and recognized the Earth is not the center of the universe, forgiving Galileo his heresy.


Tim Kane, Ph.D., is Bradley Research Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

[1]George Borjas, Labor Economics, 2nd Ed., McGraw-Hill, Boston, 2000.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)