As part of their effort to create jobs, President Obama and congressional Democrats are proposing to increase federal construction spending. This strategy will fail, because it would take resources from elsewhere in the economy. However, spending tax dollars more efficiently would create new jobs.
The Davis –Bacon Act (DBA) requires government contractors to pay wages averaging 22 percent above market rates. Federal policy should not give some workers inflated wages while others remain unemployed. Suspending the DBA would allow the government to build more and hire 160,000 new workers without increasing the deficit.
Public Works Spending Does Not Create Jobs
Increased government construction spending makes up the heart of President Obama and congressional Democrats’ second stimulus bill. The bill spends $48.3 billion on roads, government buildings, and other federal construction projects. Congressional Democrats argue that this spending will create jobs.
Despite the claims of its supporters, government construction spending would not create net new jobs. Construction spending does fund some jobs. Professor Stephen Fuller of George Mason University estimates that each $1 billion the government spends on construction projects directly employs 14,300 workers. However, this spending eliminates other jobs.
In order to pay for new construction workers, the government takes money from elsewhere in the economy through either taxes or borrowing. Each $1 billion the government spends on construction represents $1 billion less spent in the private sector. Less spending and investment means fewer private sector jobs. Research shows that the jobs lost in the private sector outnumber the jobs funded by government spending. Congress cannot reduce unemployment through public works projects.
DBA Restrictions Increase Costs
Congress can create jobs by spending the money it appropriates more efficiently. Under the DBA, contractors on all federally funded construction projects must pay their workers at least prevailing market wages. However, the Department of Labor (DOL) estimates DBA rates using a highly flawed methodology. The Inspector General has criticized the DOL for:
- Using a self-selected sample instead of a scientific random sample to estimate DBA rates;
- Allowing 100 percent error rates in audited samples of returned DBA surveys; and
- Permitting long delays in updating DBA surveys.
These errors cause DBA rates to bear little relation to actual prevailing wages. Table 1 displays DBA rates and market wages estimated by the Bureau of Labor Statistics for five American cities. As the table shows, DBA rates are well above market wages in most (though not all) cities.
Table 1 Here.
The DBA effectively requires federal contractors to overpay their workers. Sheet metal workers on Long Island earn $28.79 an hour at market rates, while the DBA requires federal contractors to pay $45.40 hour—a 58 percent premium. Nationwide, DBA rates average 22 percent above market rates.
These inflated wages unnecessarily increase the cost of federal construction projects by 9.9 percent. Repealing the DBA and paying market wages would save taxpayers $11.4 billion in 2010.
Suspending DBA Means More Infrastructure and Jobs
Alternatively, these savings could fund $11.4 billion in additional construction projects. Suspending the DBA would make each public construction dollar go 9.9 percent further. This would create more bridges and buildings at the same cost to taxpayers. It would also employ more workers. For example, if each $1 billion of federal construction spending supports 14,300 workers, then the savings from suspending the DBA would support 163,000 new construction jobs.
Unlike new public works projects, suspending the DBA would create net new jobs. These new jobs would not be offset by private-sector job losses, because their funding does not come from the private sector. Instead, the government would simply be using the money it has already appropriated more efficiently. Suspending the DBA means hiring five workers at market rates instead of hiring four workers at a 22 percent premium.
The government should always spend tax dollars wisely, but this is especially important in a recession. Workers on federally funded projects should not earn artificially inflated wages at the cost of keeping others unemployed. Sound public policy would not spend tax dollars to pay electricians on federal projects in Philadelphia a $15.30 an hour premium.
The DBA remains on the books because labor unions successfully lobby for it. Labor unions’ interest in preserving DBA should come as little surprise: DBA rates typically match union wage scales. The requirement that federal contractors pay DBA rates prevents non-union firms from underbidding unionized companies. DBA restrictions mean less infrastructure and fewer jobs in America but more jobs and higher pay for union members.
Executive Order Can Suspend DBA
If the President is serious about creating jobs, he should ignore such special interest pressure. The law allows the President to suspend DBA restrictions during national emergencies.
The President can and should issue an executive order declaring a national employment emergency. This executive order should suspend the DBA until unemployment falls below 5 percent. With one executive order, the President could create 163,000 new jobs in 2010.
Recommendations to Congress and the Administration
Congress and the Administration say they want to reduce unemployment. Spending tens of billions of tax dollars on public works projects will not do this, because the government takes these funds from the private sector. Each government-created job created comes at the cost of more than one private-sector job.
However, Congress can create jobs by spending more efficiently. The DBA requires contractors on federally funded construction projects to pay wages that average 22 percent above market rates. As a result, the government pays four workers artificially inflated wages instead of hiring five workers at market rates. Repealing DBA restrictions would fund 163,000 net new construction jobs in 2010. President Obama should issue an executive order suspending the DBA. Congress should repeal DBA restrictions before considering any additional public works spending.
James Sherk is Bradley Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.