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.

• What is the net cost of prevailing-wage laws? As with any “economic-development” issue, it is notoriously difficult to measure such things. There are many variables and dynamics that are difficult to assess. Let’s focus instead on some thought experiments to see why this can’t work as advertised by proponents:
• First, if prevailing-wage laws enhance the economy and prosperity, then we should increase those wages a lot more — to increase the benefits.
• Second, the government should pass “minimum material-price” laws for public-works projects. If artificially high prices for labor are good for the economy, then higher prices for concrete and steel will help, too.
• Third, if legislators want prevailing-wage laws for the state, they should encourage their home counties to have their own prevailing-wage laws.
• Fourth, I would recommend a prevailing wage for economics professors at public universities. Tax revenues from me would increase; my consumption at groceries, malls and restaurants would go up; and so on. It’s obviously a win-win for me and the economy.
• Finally, we should have minimum-price laws at groceries, restaurants and malls. Higher prices will yield greater tax revenues and higher wages for employees, increasing revenues and consumption. Again, prosperity for all.
  Each of these proposals has benefits, but they have larger costs. Unfortunately, the benefits are easy to see while the costs are far more subtle. Keep in mind a key lesson from Econ101: What are the alternative uses and impact of the money?

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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