Prevailing Wage Opponents Fail the Laugh Test

Part One of a Three-part Series on Prevailing Wage by Mark Price and originally published at Third and State.

Prevailing wage laws have long operated nationally and in states as a check against the tendency of the construction industry to degenerate into destructive wage and price competition. Such competition can drive skilled and experienced workers from the industry, reduce productivity and quality, and lead to poverty-level jobs, all without saving construction customers any money.

In an exhaustive review of the research on the impact of prevailing wages on contracting costs, Nooshin Mahalia concluded:

At this point in the evolution of the literature on the effect of prevailing wage regulations on government contract costs, the weight of the evidence is strongly on the side that there is no adverse impact. Almost all of the studies that have found otherwise use hypothetical models that fail to empirically address the question at hand. Moreover, the studies that have incorporated the full benefits of higher wages in public construction suggest that there are, in fact, substantial, calculable, positive benefits of prevailing wage laws.

Although the weight of evidence suggests prevailing wage laws do not raise costs, advocates for repealing the law in Pennsylvania continue to repeat some version of the following:

Prevailing Wage law also harms taxpayers, as it forces them to pay higher labor costs on public construction projects. Construction companies forced to pay union-inflated wages and benefits will pay upward of 30 percent more in labor costs for identical work on private sector projects. This adds a little more than 20 percent to the cost of every taxpayer-funded construction project – resulting in an estimated $1 billion cost for state and local taxpayers each year.

– Matthew J. Brouillette
President & CEO of the Commonwealth Foundation
March 22, 2011 

What is the source of this 20% saving claim? One source is Nathan Benefield, the research director of the Commonwealth Foundation, in this 2009 blog post.  

Benefield compared wages as measured in Occupational Employment Statistics (OES) to the Pennsylvania Department of Labor and Industry’s prevailing wage and concluded that prevailing wage rates are on average 37% higher (in a future post, I will address this issue directly). To estimate how this difference will affect total cost, Benefield assumed that labor represents 45% of total cost.

There are several problems with this analysis. 

Today I will address the first: it fails the laugh test. According to the 2007 Economic Census of Construction, labor costs represent no more than 24% of total construction costs in Pennsylvania. In road and bridge construction, much of which is funded by the state and thus impacted by prevailing wage regulations, labor costs represent no more than 21% of total cost.

If labor were 45% of total costs, and cutting wages and benefits were to have no impact on worker productivity, it would be possible to achieve a 20% reduction in total costs with a 37% reduction in labor costs. 

But only in Commonwealth Foundation World do labor costs account for 45% of construction costs. Tables 1A and 1B below show that if you use actual data on labor’s share of total cost, the wage declines necessary to achieve a 20% reduction in total construction cost are impossibly – laughably – large.  

In all construction, for example, labor costs are 24% of total costs. With labor costs at 24% of project costs, wages must fall by 70% to wring 20% out of total production cost, from $36.30 to $10.89 per hour for a carpenter in Philadelphia – that’s below even what Benefield claims Philadelphia carpenters make when not on a prevailing wage projects (see Table 1A).

With labor costs equal to 21% of project costs, as on road and bridge construction, wages would have to fall 80% to lower total costs by 20% (see Table 1B). Cement masons in Dauphin County employed on a road project would see their wages fall from $34.76 per hour to $6.95 per hour (the minimum hourly wage is currently $7.25).

Table 1. Changes in total cost as a function of the share of labor cost
 
A: Benefield’s calculation assuming labor represents 30% of total construction cost in PA
  With P.W. Without P.W. % Change
Labor Cost $240,000 $72,000 -70.00%
Non-Labor Cost $760,000 $760,000  
Total Cost $1,000,000 $832,000 -20.19%
 
B: Benefield’s calculation assuming labor represents 21% of total cost in road & bridge construction
  With P.W. Without P.W. % Change
Labor Cost $210,000 $42,000 -80.00%
Non-Labor Cost $790,000 $790,000  
Total Cost $1,000,000 $832,000 -20.19%
 
Note. The calculation of percent change is sensitive to the point of reference. The percent change in labor cost is calculated relative to the labor cost with a prevailing wage. The percent change in total cost is calculated in reference to total cost without a prevailing wage. To switch the point of reference is unconventional but necessary to remain consistent with the manner in which Benefield made his calculations. Calculating the percent change in total cost in the cases above where total cost with a prevailing wage is the point of reference results in a 17% decline in total costs.

Recall that Benefield’s laughable savings projections are the basis for the claim that the state can save $1 billion per year. Don’t count on it. 

On Tuesday: Prevailing Wage Oponents Fail Labor Market Stats 101

How About A Sitdown Strike Across Hershey’s Supply Chain?

A blog post by Stephen Herzenberg, originally published at Third and State.

By now most of you have heard about the recent Hershey incident in which foreign students, having paid for the privilege of participating in a “cultural exchange” visit to the United States, found themselves packaging the candy company’s chocolate for about $8 per hour (not counting the upfront fee for the program and before you subtract the living costs taken out of the students’ paychecks). 

As Pennsylvania AFL-CIO President Rick Bloomingdale and I pointed out in a recent Philadelphia Inquirer op-ed , the implications of this incident go far beyond the advantage taken of the 400 students. It’s a case that demonstrates the irresistible urge of global corporations to fragment workers in their production chains so that the most vulnerable can be paid very low wages. Hershey, after all, has a stronger motivation than most corporations to resist this impulse: it’s in a capital-intensive industry, it has a cherished consumer brand placed at risk by the relentless pursuit of low wages, and the company is held in trust on behalf of a school for underprivileged children. The Hershey case demonstrates the need for constraints on companies’ freedom to pursue low-wage strategies.

Our suggestion in the Inquirer was a union that cuts across the entire company supply chain (within the U.S. for starters). This type of “network” unionism would generate long-term economic benefits for the U.S. because companies would be able to pursue productivity enhancing strategies with all their workers and also through cooperation among plants at different points in the production chain.

Since the legislative route to such multi-plant unionism could take a while, what about taking a tactic out of the students’ playbook – and out of the 1930s – a sitdown strike, this one including all workers in the entire Hershey production chain?

More than any other single step that I can think of, broad-based unionism that restores industrywide private-sector wage and benefit standards – in local service industries as well as within manufacturing – could fix the economic inequality threatening the United States and restore the middle class.

The Middle Class ‘Under Attack’

A blog post from Mark Price, originally published on Third and State.

At the Keystone Research Center, we have been chronicling for years the forces that are putting a tighter and tighter squeeze on middle-class Pennsylvanians.

Last week, we released a new report in partnership with the national policy center Demos that takes the temperature of the state’s middle class in the wake of the Great Recession. I’m sorry to say, once again, the patient is not well.

The state’s annual unemployment rate is the highest it has been in nearly three decades and the cost of going to college is on the rise.

According to the report, times are particularly tough for Pennsylvania’s young people, with state budget cuts to 18% of public university funding and a 7.5% tuition hike in Pennsylvania’s State System of Higher Education. Pennsylvania’s young people already bear the seventh highest rate of student debt in the nation – at approximately $28,000 on average.<!–break–>

A few more quick facts from the report:

  • Pennsylvania’s unemployment rate in 2010 (8.7%) was the highest rate in the state in 30 years.
  • At $10,761 for 2009-10, in-state tuition at Pennsylvania’s colleges and universities is well above the national average of $6,829.
  • Nearly three out of four of college graduates in Pennsylvania entered the labor force with student debt in 2009, and their average debt-$27,066-was the 7th highest in the nation.

Since the 1980s, the middle class has been under attack in Pennsylvania, and now we’re seeing the next generation being forced onto the downward economic escalator. That’s troubling for a number of reasons, but not least of all because it comes at the expense of our single greatest invention. As Bob Herbert, a former New York Times columnist and now a senior fellow at Demos, put it:

The middle class is more than an income bracket – it’s a promise, that if you work hard and play by the rules, you’ll earn enough to achieve a reasonable level of comfort and security, enough at the very least to support yourself, raise a family and enjoy the fruits of truly free society. That was a real 20th century invention – a novel possibility for regular people to enjoy that degree of freedom.

The middle class didn’t create itself, and its unraveling didn’t happen by accident. It reflects public policies that have squeezed the middle class and sent inequality soaring. Again, Herbert notes:

In some cases, we just failed to act – we let the minimum wage continue to lose its earning power, we let jobs be shipped overseas and did nothing to invest in new industries. We let the right to form a union be relentlessly attacked to the point where it’s now a real David and Goliath battle to unionize a company.

In other cases, we took action, but in the wrong direction, such as irresponsibly cutting taxes, which made it all but impossible to continue to invest in the types of public structures – our roads, schools, libraries, for example – that help all of us reach our full potential. In the four recessions since 1980, we’ve seen cuts to education, health care, infrastructure, and on and on. Tuition at public universities has tripled since 1980.

In the years leading up to the Great Recession, the middle class and the aspiring middle class had already lost tremendous ground. Now the ongoing jobs crisis – with nearly 5 workers for every 1 job that is currently available – and the cuts in vital state services have only deepened the pain and increased the emotional distress.

Before you get too depressed, there is good reason to have hope for the state’s long-term prospects. Pennsylvania has weathered the recession better than many other states, and we continue to have higher union membership rates than the national average, which provides a strong basis for improving worker rights and employer responsibilities for all workers.

The key will be whether our state and federal policymakers have the good sense to enact effective policies that allow Pennsylvania workers to regain a permanent place in the middle class.

Third and State Recap: Marcellus Jobs, Pa.’s Budget, Paid Sick Days & a Misleading Health Care Stud

Over the past two weeks, we blogged at Third and State about Pennsylvania’s state budget, Marcellus Shale job creation, paid sick days legislation in Philadelphia, and a thorough debunking of a misleading study on the Affordable Care Act.

IN CASE YOU MISSED IT

  • Last week, Pennsylvania enacted a 2011-12 state budget, with deep cuts to schools, health care and human services, while leaving most of a $785 million surplus on the table. Sharon Ward had an overview of the budget and also posted this media statement calling it a budget that does less with more. Michael Wood, meanwhile, shared the Pennsylvania Budget and Policy Center’s year-end Revenue Tracker.
  • On paid sick days, Stephen Herzenberg blogged about Philadelphia Mayor Michael Nutter’s veto of a bill that would have allowed every worker in the city to earn paid sick days.
  • On the Marcellus Shale, Stephen wrote about a recent Keystone Research Center policy brief on the actual job contribution of the Marcellus boom and also reflects on the attacks it generated from the natural gas industry and its allies. He also wrote about a statement from Lieutenant Governor James Cawley repeating widely-circulated figures that  risk a misleading impression of job creation in the state’s Marcellus Shale industries.
  • Finally, on health care, Chris Lilienthal highlights a recent blog post from Ron Pollack at Families USA that thoroughly debunks a misleading study about the impact of the Affordable Care Act on employer-provided health coverage.

More blog posts next week. Keep us bookmarked and join the conversation!

Philadelphia Mayor Vetoes Paid Sick Leave Bill

( – promoted by John Morgan)

A blog post from Stephen Herzenberg, originally published on Third and State.

Some bad news out of Philadelphia Tuesday – Mayor Michael Nutter vetoed legislation that would have allowed every worker in the city to earn paid sick days.

As Lonnie Golden, a professor of economics and labor studies at Penn State Abington, and I wrote in an op-ed earlier this month, a paid sick days law would be good for business, good for the economy and good for public health in Philadelphia.

The public seems to agree. Seven in 10 Philadelphians supported the bill, according to a recent poll.

As we wrote in our op-ed:

Paid sick days are good for business and the community, as well as for families. Businesses save because worker turnover declines, lowering hiring costs and eliminating lost productivity as new workers get up to speed.

The cost of hiring is high compared to paying for sick days because managers and human-resource professionals who recruit earn more than lower-wage workers. Businesses also save because paid sick days reduce worker resentment and improve worker-manager relations.

The community benefits because, when sick workers stay home, disease doesn’t spread to other workers or to customers. Workers also obtain more timely medical care and recover faster, reducing lost productivity and holding down health-care costs.

Hopefully, City Council will agree and override the Mayor’s veto when it reconvenes in September.

Third and State This Week: Preserving Tobacco Funds for Health Care and Fasting for PA’s Vulnerable

This week, we blogged about the latest job numbers, efforts to preserve tobacco settlement dollars for health care services, paid sick days legislation and more.

IN CASE YOU MISSED IT

  • On health care, intern Emma Lowenberg blogs about an effort by consumer health advocates to urge the state Senate to preserve Pennsylvania’s share of tobacco settlement funds for health care purposes.
  • On the state budget, Chris Lilienthal writes about the “Fast for PA’s Vulnerable,” an effort by Harrisburg faith leader Stephen Drachler to draw attention to the impact of budget decisions on Pennsylvania’s most vulnerable by abstaining from solid foods.
  • On unemployment and the economy, Emma sums up the May jobs report by turning to the expert analysis of four leading economists.
  • And on workplace issues, Steve Herzenberg shares a recent op-ed he coauthored with economics and labor studies professor Lonnie Golden on the benefits of paid sick days in Philadelphia.

More blog posts next week. Keep us bookmarked and join the conversation!

Third and State This Week: Teacher Salaries, Legislative Updates & Paid Sick Leave in Philadelphia

This week at Third and State, we blogged about teacher salaries and a paid sick leave bill in Philadelphia City Council, along with providing legislative updates on efforts to cut unemployment benefits in Pennsylvania and advance a state budget with deep cuts to education and human services.

IN CASE YOU MISSED IT:

  • On workplace issues, Steve Herzenberg takes apart an analysis by an economist for the National Federation of Independent Business that vastly overstates the impact of a paid sick leave bill now before Philadelphia City Council.
  • On unemployment insurance, Mark Price reports on the defeat of an anti-worker unemployment compensation bill in the state House, and has a follow-up post with data on income in York County to explain what is at stake when politicians tinker with unemployment.
  • On the state budget, Chris Lilienthal writes about House passage of a state budget that cuts $1 billion from public schools and reduces Governor Corbett’s budget by $471 million for health and human services for women, children and people with disabilities.
  • Finally, on education, Steve Herzenberg highlights a project that is educating Americans on the relatively low teacher pay in this country compared to the most successful educational systems in the world.

More blog posts next week. Keep us bookmarked and join the conversation!

Using NFIB Economist’s Estimates on Paid Sick Days: It’s Not Cricket

A blog post from Stephen Herzenberg, originally published on Third and State.

As a kid living near Manchester in the north of England, my first love was cricket. The sport (it is a sport) comes up nowadays when I use the phrase “it’s not cricket” – as in, it’s not acceptable, it’s not done.

In a report circulated to Philadelphia City Council and the media (but not online that I can find), Dr. William Dunkelberg estimated the cost to employers of enacting paid sick days legislation in Philadelphia. Even if you oppose paid sick days, you shouldn’t use the Dunkelberg estimates because, well,  “It’s not cricket.”  The estimates are so transparently inflated that folks who live in a fact-based world shouldn’t use them.

Dr. Dunkelberg, the Chief Economist of the National Federation of Independent Business, conducted an analysis of implementing paid sick days, concluding that it would cost $350 million to $752 million to implement, and would reduce employment by 4,000 jobs.

So what’s wrong with this estimate? (This post draws from a more extended critique of Dunkelberg online.)

The most basic mistake is that Dr. Dunkelberg double counts the maximum cost of paid sick days. He assumes that workers will take all their legally permitted paid sick days each year, costing $350 million. He then says that some of the absent workers will be temporarily replaced. The maximum cost of this, if every worker is replaced, would be another $350 million. So that gets you to $700 million. Add $52 million in compliance costs at businesses that already have paid sick days and you get Dunkelberg’s $752 million figure.

But wait a minute. If workers aren’t sick, they get their job done at a cost to the employer of $350 million. If those workers are out sick and temporary replacements are hired, the work still gets done but somehow it costs the employer an additional $700 million? Wrong. The additional cost is $350 million – $700 million minus $350 million equals $350 million. I keep asking myself, am I missing something here? He can’t possibly have made this kind of mistake, can he? He can and he did.

Beyond this, consider two assumptions that drive Dr. Dunkelberg’s high-cost estimate.

First, he assumes that all workers take all of their sick leave. Evidence from national surveys and San Francisco indicates that people actually take a third to 40% of their permitted leave.  Many workers view paid sick days as insurance – to be saved up in case they are needed, not used as personal days or extra vacation. Using the 40% figure, $350 million becomes $140 million.

Second, let’s consider how much employers actually hire replacements. Data from San Francisco indicate that employers do so less than 10% of the time. That means the additional, out-of-pocket, labor costs (for employers currently without paid sick days) fall to less than $14 million, a far cry from $700 million.

To be fair, there will be some lost productivity when workers are not replaced. It’s hard to say how large this will be. Many workers who are occasionally out sick “get their work done” anyway. (I don’t notice my work disappearing when I’m out.) Where that is not possible (e.g., nursing home care, customer service jobs, hotel housekeeping), other workers may pick up the slack. Based on this, the $14 million might climb to somewhere between $50 million and $100 million.

But wait, we haven’t even considered yet a series of positive benefits from paid sick days:

  • Reduced turnover and recruitment and training costs
  • Improved worker-supervisor relations and higher levels of work effort and commitment as workers’ reciprocate for paid sick days
  • Reduced health problems due to contagion of other workers and of customers or clients

When you take all of these factors into account, there is a solid analytical and empirical reason for believing that implementing paid sick days would pay for itself – or better.

Bottom line, when carefully scrutinized, William Dunkelberg’s analysis of the costs of the proposed Philadelphia paid sick days ordinance is simply not credible. Regardless of whether you think paid sick leave is a good idea or not, if you agree with me about the Dunkelberg study, I hope you won’t use it. Because using something you know is wrong, “that’s not cricket.”

Come back next week for another take on why advanced labor standards such as paid sick leave can be good for the economy.