Know Your Wage: Prevailing Wage

Worker compensation varies significantly in the United States and worldwide. These differences arise from multiple, intersecting factors, including a worker’s occupation, industry, geographic location, education, work experience, gender, and race-ethnicity, among others.

Differences in wages and compensation are one of the primary sources of economic inequality. Two mechanisms to combat this inequality and promote fairer wage distribution include collective bargaining by trade unions for their members and government intervention in the labor market.

The minimum wage is the most well-known way the government intervenes in the labor market to influence wage distribution. However, an alternative wage policy has been used in the construction industry since the late 19th century: the prevailing wage.

What is a Prevailing Wage?

Construction projects in the U.S. that are funded through public monies (i.e., taxes) go through a bidding process. In this bidding process, government procurement agents are generally required to select the lowest bidder. In this lowest-bid model, contractors work to lower their bid however possible to win the contract. They may lower the bid by reducing worker wages and eliminating long-term costs like training or benefits, for example.

Without legal protections, this procurement model fuels a race to the bottom. A race to the bottom means that construction firms cut as many costs as possible to reduce their overall bid price in order to win the project. In so doing, such firms often try to minimize the wages they pay to their workers. This situation is especially prevalent among firms that come from lower-wage regions or markets. When out-of-state contractors enter local markets to win large government construction contracts, they frequently undercut existing firms in those markets. The race to the bottom in a lowest-bid model can take jobs away from and erode working conditions for a place’s local labor force.

Recognizing the problems this model of procurement creates for construction workers, in the late 19th and early 20th centuries, some states—starting with Kansas in 1891—put laws in place that required contractors for state-funded construction projects to pay their workers no less than the “prevailing” wages and benefits already agreed upon by contractors and workers for comparable local work done on similar projects.

These laws established a minimum labor standard for public construction projects by setting a wage and benefits floor for projects covered by state law. The upshot is that if contractors want publicly funded work, they cannot submit a bid with labor costs lower than the established local prevailing wage.

From State to Federal

After Kansas passed the first "prevailing wage" law for state-funded public works projects, other states followed. Consequently, state-level prevailing wage laws pressured the federal government to follow suit for federally-funded construction projects.

In 1931, the U.S. Congress passed the Davis–Bacon Act. The Davis-Bacon Act requires private contractors to pay prevailing wages to employees on all federally-funded construction projects over $2,000 for construction, alteration, or repair of federal public buildings or public works.

To this day, the Davis-Bacon Act has been central to the modern American procurement system. The prevailing wage framework has fostered productivity and trained skilled workers to build the America of today. Prevailing wages also ensure the construction of a growing, technologically sophisticated, and competitive national economy.

Bipartisan support from Presidents and Congressmembers has allowed billions of dollars of spending by federal, state, and municipal contracting agencies. Thanks to prevailing wages, these agencies have constructed military bases, surface transportation systems, housing, hospitals, schools, and sewer systems.

Why Do Prevailing Wage Laws Matter?

Research has shown that compared to states with strong prevailing wage policies, states with weak or no prevailing wage laws are more likely to experience displacement of local workers by migratory, low-wage, exploited workers who were forced to put up with significant health and safety violations while on the job.

When local workers and companies are employed, researchers found that more project funds remain circulating in the local economy. Prevailing wage laws provide important pathways into the middle class for construction workers by keeping industry wages high.

Prevailing wage laws encourage skilled workers to enter the construction industry and incentivize firms to train workers, boosting productivity and lowering worker injury rates. Combined, these benefits promote overall stability on a job site (i.e., low turnover rates), which helps reduce total project costs.

Well-paid construction workers are also significantly less likely to draw on essential public benefits, such as SNAP and Medicaid, to meet basic economic needs.

Looking to the Future

Prevailing Wage laws aid economic inequality by reducing wage gaps between the top and the bottom earners. But it goes further.

Some economists have argued that the forces shaping economic inequality are not forces out of our control. Instead, social and economic policy choices shape economic disparities. Importantly, key social and economic policy choices made can be traced, directly or indirectly, to changes in the balance of power.

If we agree with this line of argumentation, then countervailing power must be applied if we are to reduce economic inequality. A good example of countervailing power is our choice to apply important labor market policies, such as prevailing wage laws, to influence the distribution of wages in the construction industry.

Prevailing wage laws are an important way to realign the balance of power between capital and labor, thus altering the distribution of wages toward a fairer world.