Schansberg: Trying to Legislate Prosperity

February 18, 2015

by Eric Schansberg, Ph.D.

Indiana’s Common Construction Wage Law is typically referred to as a “prevailing-wage” law. Such laws are a state’s version of the federal Davis-Bacon laws dating back to the 1930s that provided minimum wages on public-sector construction. In Indiana this year, there are measures seeking to repeal or weaken the state’s prevailing-wage law.

As always, the choice is whether to allow markets to do their thing or to use government to regulate and restrict. This choice raises ethical questions: Is it ethical to use law to increase the cost of public-works projects to taxpayers? Is it ethical to allow markets to determine wages for workers on these projects?

The choice raises practical questions as well. One claim by proponents of prevailing-wage laws is that artificially high wages serve to increase tax revenue and consumer spending. They even provide estimates of the impact, i.e., that communities receive $1.50 in benefits for every $1 in costs.

If we simply focus on the benefits of the policy — the higher wages — then this is quite reasonable. These workers will have more money in their paychecks and will pay more in taxes and spend more money. (They’ll also give and save more.)

But what about the costs? Where did the money come from and how would that have helped the community?

At best, it’s obviously a shell game, moving money from one person’s pocket to another — with no net gain in economic activity. At worst, it’s an inefficient regulation that restricts competition and drives up administrative costs.

Prevailing-wage laws might be a good idea if we want to help certain workers, but don’t imagine that they will increase net economic activity.

So what difference would it make to repeal prevailing-wage laws? Nobody knows for sure. As with the passage of “Right to Work” legislation a few years ago, it’s difficult to quantify. We do know that it would make economic activity in Indiana more attractive at the margin.

To summarize, this problem is more political than economic. Concentrated benefits always attract passionate efforts to preserve the status quo — while subtle costs rarely get voters excited.

Our politicians, then, have to decide if they will fight a special-interest group in order to help the economy and the general public — quite a dilemma for those who want to get reelected.

Eric Schansberg, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is a professor of economics at Indiana University Southeast.

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