John P. Gould is associate professor of business economics at the Special Analysis Number 15, November 1971 Price $3.00 per copy 1971 by American Enterprise Institute for Public Policy Research, Washington, D.C. Permission to quote from or to reproduce materials in this publication is granted when due acknowledgment is made. Library of Congress Catalog Card No. L.C. 70-185048 INTRODUCTION THE DAVIS-BACON ACT Contents Wage Differentials-A Brief Digression Other Federal Laws Requiring Davis-Bacon Prevailing Wage ADMINISTRATION OF THE DAVIS-BACON ACT Procedure for Predetermination of Wage Rates General Accounting Office Studies Professor Gujarati's Study The Measurement of the Effect of Prevailing Wage Laws on 1 3 35 6 9 9 10 11 15 18 ... 21 ... 23 27 SUMMARY APPENDIXES A. An Algebraic Model of the Effects of Prevailing Wage Laws 31 37 C. Davis-Bacon Act (as amended) 41 Acknowledgments In doing the research for the paper I have benefited greatly from the help of Mr. George Burman with whom I have discussed many of the results contained herein and of Professor Roman Weil who commented on an earlier draft of this paper. Further acknowledgment is due Yale Brozen, Ronald Ehrenberg, Damodar Gujarati, Marvin Kosters, and Michael Moskow whose research is reported and discussed in the following pages. Introduction The Davis-Bacon Act requires payment of "prevailing" wages and fringe benefits to workers on federal government contracts for the construction of public buildings or public works. The required wage rates are those determined by the secretary of labor to be prevailing in the city, town, village, or other civil subdivision of the state in which the work is performed. Numerous other laws incorporate the Davis-Bacon prevailing wage requirement for federally assisted projects such as highways, airports, housing, hospitals, schools, and defense facilities. This paper is a survey of the key literature dealing with the economic and social consequencies of this legislation. In 1970, wage increases for 3 million union members in the construction industry averaged between 15 and 18 percent. This rapid increase led President Nixon, on February 23, 1971, to suspend the prevailing wage law, better known as the Davis-Bacon Act. The President noted in his proclamation that the nation was confronted by a set of conditions involving the construction industry which, when taken together, created an emergency situation. About one month later, on March 29, 1971, the President announced that the construction industry had agreed to a voluntary system of constraints aimed at keeping negotiated construction industry wages at an annual level of about 6 percent. The Davis-Bacon Act was reinstated at that time. The purpose of this paper is to examine the role which this apparently influential piece of legislation—the Davis-Bacon Act-plays in the determination of construction industry wages. We begin with a brief examination of the behavior of wages (union and nonunion) in contract construction in recent years. Table 1 shows that in recent years, the rate of increase in wages in the contract construction industry has been appreciably greater than the increase in wages in the private nonagricultural sector. Moreover, while the rate of wage increase in the total private nonagricultural sector and in the manufacturing sector moderated somewhat in 1970 this was not so in contract construction. In fact, construction wages increased 9.2 percent between 1969 and 1970, almost a full percentage point faster than the 8.3 percent increase in 1968-69. There are, of course, many possible explanations of this large wage increase in the construction industry: the demand for housing, the relative amount of unionization, the number of newly trained craftsmen that are available to the industry, the amount of seasonality in construction work, and the effect of government policies, to name a few. This paper deals only with the last of these, or more specifically, with the economic impact of the Davis-Bacon Act. Table 1 PERCENTAGE INCREASE IN AVERAGE GROSS HOURLY EARNINGS IN SELECTED PRIVATE NONAGRICULTURAL INDUSTRIES, 1965-1970 Source: Economic Report of the President, 1971, Council of Economic Advisers, Table C29, page 231; data provided by the U.S. Department of Labor, Bureau of Labor Statistics. Perhaps one of the most surprising findings of this paper is that relatively little careful research has been done on the economics of the Davis-Bacon Act. Since the act appears to play a key role in understanding the wage structure of the construction industry, and since a substantial amount of related legislation is based on the logic of the Davis-Bacon Act, it is particularly unfortunate that economists have not done more to further our understanding of this law. In the review of the literature that follows, the author has leaned very heavily on the work of Professor Damodar Gujarati and on the work of Ronald G. Ehrenberg, Marvin Kosters, and Michael Moskow. My main objective in this paper has been to pull together and interpret the major existing evidence on the economic impact of the Davis-Bacon Act-primarily the studies by Gujarati and Ehrenberg. In addition, however, I have endeavored to construct a formal means of accounting for the impact of Davis-Bacon legislation on average construction industry wages. This work is discussed in detail in Appendix A.1 1 Unfortunately, it has proved difficult to get satisfactory empirical estimates of the key variables in the formal model and it is not easy to give an answer to the question of just how much average wages are influenced by Davis-Bacon determinations and contracts. It is hoped that others will be encouraged to contribute to the solution of this problem. |