The theory was simple. The law merely required contractors to pay "prevailing" wages on federal projects, and the Labor Department was to determine what those prevailing wages were. In practice the program has worked perversely. to put it mildly.

John P. Gould, associate professor of business economics at the University of Chicago's Graduate School of Business, details some of the results in a new study published by the American Enterprise Institute. As he notes, the results have become more pervasive and damaging as the prevailing wage scheme has been extended to many other types of projects, including those aided by the federal government.

One problem has been that the Labor Department's wages-determination staff has not been large enough to cope with a massive and growing work load. As a result the department has tried to simplify its task, often leaning heavily on arguments and information provided by construction unions, hardly disinterested parties.

Professor Gould recounts the trouble the Navy had with a housing project for the Marine Corps School at Quantico, Va. The Navy told the Labor Department that the latest prevailing-wage figures for the area were far in excess of the wages that actually did prevail there. The department lowered its figures but labor unions protested, so it went to the original, out-of-line wage rates. With the strong influence of the unions it's hardly surprising that the Labor Department's determinations are union rates, no matter what portion of the workers in the area are unionized. If union rates are relatively low or nonexistent in an area, the Labor Department may settle for the high union rates in an area many miles away.

The Chicago professor's analysis cites a General Accounting Office study: "Wage determinations for power equipment operators on federally financed projects throughout Maine were found to be higher than those prevailing in Maine. The Davis-Bacon rates corresponded to union-negotiated rates in Boston, Mass."

It's obvious that the prevailing-wage program helps to extend and solidify union pay scales. When Davis-Bacon rates are out of line and a local labor market is tight, the prevailing-pay setup can put strong upward pressure on all local wages.

"By creating artifical wage differentials," Professor Gould writes, "the DavisBacon Act tends to cause greater frictional unemployment in the construction trades. Construction workers appear to be willing to forgo current employment in order to wait for jobs paying higher union wage rates."

The prevailing-wage machinery helped to cause the sharp rise in construction wage rates in recent years, a rise that was accompanied by heavy unemployment. Unable to get the unions to moderate their demands, President Nixon early last year suspended the Davis-Bacon Act; the unions then agreed to a pay stabilization committee and Mr. Nixon reinstated the act.

Public members of the committee boast that the group has slowed the industrys wage rise to "only" 11% a year, and the Pay Board struggles to slow wage boosts elsewhere. Meanwhile, the Davis-Bacon engine of pay inflation roars right ahead.

[From Barron's, Jan. 25, 1971]
WARPED YARDSTICK

TO LOWER CONSTRUCTION COSTS, REPEAL THE DAVIS-BACON ACT The following commentary is taken from a speech, "Measures for Improving Construction Industry Health," given recently before the Construction Industry Manufacturers' Association, Chicago, Ill., by Yale Brozen, Professor of Business Economics, Graduate School of Business, University of Chicago.

The question I want to discuss with you is what should be done about the escalation of construction costs, both in the wage area and in the interest cost area. There are some proposals about what to do-but none has touched on the fundamental problem. The proposals consist largely of changing some of the mechanisms and organization for collective bargaining. It is proposed that agree

ments be made by contractors in an area bargaining jointly with the unions in that area instead of the present arrangements and that this be required by law. There are also committees being set up of customers for construction to arrive at some consensus for dealing with contractors in ways which will reduce the pressures on them to pay whatever their employes ask in order to get on with the jobs for which they have contracted.

These rearrangements will deal with some small pieces of the problem-but they do not get at the more important causes for high construction costs. The most important immediate single cause of high construction costs is the Davis-Bacon Act and the way in which it is administered. The next most important cause is the amount of governmntal funds appropriated and spent for construction. In terms of long-run considerations, the lack of production of trained construction workers is skyrocketing costs. New construction workers are being trained at only half the rate required to replace retiring workers.

Taking up the governmental funds point first, I know that it will seem heresy to you to say that we should work to reduce the amount of local, state, and federal appropriations for construction if you want to have a healthy construction industry. If not heretical, this certainly appears to be a paradoxical statement. How can you have a healthier construction industry by reducing governmental demands for construction?

Let's recognize that at any given time there are limited amounts of manpower and capital available for the construction industry. When the Federal government appropriates funds for the construction of public housing, that does not increase the amount of housing built. It simply results in the diversion of manpower from building private housing to the construction of public housing. The more public housing built, the less private housing. A major reason for the decline in private housing construction last year and early this year is the diversion of manpower and capital to other kinds of construction. When other varieties of construction began to slow early this year, private housing starts turned up because the manpower and funds formerly diverted to other uses were released and were left for use in building housing. We have had a 20% rise in housing starts since the first quarter simply because manpower and capital are being released from other varieties of construction.

At any given time, construction of more public buildings reduces the amount of private building. The total volume of construction does not increase, then, when we build more public buildings. We simply get different buildings, not more buildings, as a result of governmental building activity. If that were the only effect of governmental appropriations for construction, the total volume of construction would be unchanged. However, the total volume is reduced by governmentai 2ppropriations for public housing and public buildings and the construction industry is left worse off.

Because of the way in which the Davis-Bacon Act is administered and because of the existence of this legislation, a dollar of government money does not buy as much construction as a dollar of private money. Since the sale of government bonds competes for money which could otherwise go into the mortgage market, government construction diverts funds from private construction as well as manpower. Since each dollar diverted from the private mortgage market to the government market buys less construction than in the private market, the construction industry suffers from the diversion of funds.

If we are to avoid the deleterious effects of governmental activity in construction, the Davis-Bacon Act must be repealed. Failing that, we much change the way in which the act is administered by the U.S. Department of Labor. We must insist that the Department of Labor stop violating the law in its minimum wage determinations.

Under the Davis-Bacon Act, contractors putting up Federal structures or putting up private structures whose financing is assisted by the Federal government must pay wage rates and fringe benefits prevailing in the "city, town, village or other civil subdivision of the state in which the work is performed." The Wage Determination Division of the Department of Labor determines prevailing wage rates in advance of inviting bids for federal projects.

It is this determination of "prevailing wage rates" that reduces the amount of construction bought with a federal dollar compared to what would be bought with the private dollar if it were not diverted to a federal project or federally assisted project. To take one example to illustrate what goes on, let's take look at the 450 unit Capehart housing project at the Marine Corps Schools, Quantico,

Va. The Wage Determination Division established minimum wage rates for this Virginia project without even bothering to survey the wage rates being paid in the area. It simply used union rates in Washington, D.C., to set a schedule of minimum rates for various crafts in Quantico, Va., despite the specific provision in the Davis-Bacon Act that prevailing rates in a "civil subdivision of the state in which the work is to be performed" are to be used.

The Washington union rates used by the Department of Labor ranged from 65¢ to $1.95 an hour higher than the rates currently paid by the builders of a 300 unit and a 400 unit housing project in Quantico at the time. The result was that the Federal government obtained much less construction per dollar spent than the builders of the private projects obtained. In over 90% of Federal determinations of minimum wage rates to be paid by contractors, the Wage Determination Division simply uses union rates supplied by unions, although in some crafts less than 60% of the workers belong to unions.

Not only does the Wage Determination Division use union rates, but also in about 50% of its determinations, it does not use the pay rates prevailing in the county where the work is done. It uses rates from other counties. About half the time, the rates are from counties which are not even contiguous to the county in which the work is being done. The result of these determinations frequently is to import high union rates from a major metropolitan area to a rural area where prevailing rates are much lower and to give us a very bad bargain for the Federal construction dollar.

In addition, this provides a strong motivation for unions to drive wage rates up. Although this kills many private projects, union members feel that they make up for the loss of work by what they milk out of government projects. This certainly was the motivation for pushing rates in Albany, N.Y., to the $9 to $10 hourly level when New York launched its project for the complex of new state buildings in Albany. A project which was originally figured to cost 250 million dollars is turning out to cost 200% more.

The effect of the Davis-Bacon Act, and similar laws on the books in many states, is not only to reduce the amount of construction purchased with public dollars, but also to drive up the price of private construction. Not only is the price of private construction driven up, but also the financing cost.

Although the Federal government has set up a number of programs designed to reduce interest cost for funds used in residential construction, the net effect of the Federal government's activities has been to increase interest costs in private projects. We don't have any studies of the response of all construction to changes in interest costs. We do know that in housing, a rise in interest rates from, let us say, 7% to 8% reduces the amount of current residential building activity by 10% to 15% compared to what it otherwise would be.

When the government runs at a deficit, such as the Federal deficit of $25 billion in fiscal 1968 and the deficit of $14 billion in the current fiscal year, the result is a drain of funds from capital markets-funds which would otherwise be available for private purposes such as construction. As a consequence of this drain of funds from the capital markets, interest rates are forced up. In the last two years, they have skyrocketed. Since construction-especially residential construction-is sensitive to interest rates, the result is to reduce the volume of construction relative to what it otherwise would be. If Federal deficits had been smaller in recent years, the boom in construction in the latter 'Sixties would have been greater than it was.

Part of the reason for Federal deficits was the high cost for many projects caused by the Davis-Bacon Act. A second reason, of course, is the large amount of Federal building and federal assistance to building. The Federal funds provided for construction were not, then, an unmixed blessing. They were diverted from private construction.

If we want to get interest costs down and improve the supply of funds for private construction, we must reduce the amount of government spending and the size of deficits in Federal, state and local budgets. There are obvious candidates for elimination from the Federal budget. There is absolutely no good reason to engage in financing the development of a supersonic transport. The only reason still being offered for this project is that we need a competitor to the Concorde to avoid a drain on our balance of payments. But the Concorde is not going to be purchased by airlines if they keep their sanity. It is an uneconomic airplane which will be worth buying only if they can find customers who are willing to pay 40% more than is now paid for first-class accommodations on transatlantic flights. That seems unlikely, to say the least.

Another obvious candidate for elimination from the Federal budget is the Rural Electrification Administration. Its job was finished long ago. It insists that it needs to stay in business to finance ski resorts and golf courses-but I would suggest that these enterprises, if they are worth undertaking, do not need 20% money from the REA and should not be subsidized.

And I am strongly suggesting that funds for public housing be eliminated from the Federal budget, for reasons I have already indicated. There are additional reasons, such as the fact that these projects have become cesspools of crime. Tenants are frightened to death and thousands of public housing units sit vacant because people are frightened of moving in and terrified tenants have fled (Barron's, July 27, 1970).

Rather than going on discussing candidates for elimination from the Federal budget, let me turn to a discussion of the bottleneck in the production of trained construction workers which has been a cause of the frantic bidding for construction labor, a cause of large overtime charges, and a cause of skyrocketing construction costs. Again, I can point to the fact that housing demand is very sensitive to the cost of construction. A 5% rise in cost causes the demand for housing services to be about 5% less than it otherwise would be and, in the short run, cuts the demand for new housing construction by about 25% compared to what it otherwise would be.

Demand is cut not only by a reduction in the number of starts, compared to what it otherwise would be, but also by a reduction in the amount of housing demanded per unit and a cut in quality. We already are seeing for that first time in a long time, a reduction in the average size of the housing units currently being built and sold despite rising income levels. The cost of housing construction has risen so much that people simply cannot afford as much housing as they formerly bought at lower income levels when construction costs were cheaper. If we are going to do anything about restraining the rise in cost, we must, among other things, step up the rate at which construction workers are being trained. Between union restraints on numbers of apprentices on the one hand and a fragmented industry using a transient labor force on the other hand, we are training only half the number of workers required to replace retirements from the construction labor force. Few contractors are willing to take on much of a training task because very few maintain a permanent labor force. Most simply figure that the people they train on the current job will simply be working for somebody else after the current job is finished. Why, then, invest in training workers for somebody else?

The industry is going to have to learn either to keep a more permanent work force for each employer, which may mean that contractors and developers will have to both become part of the same organization, or the industry will have to agree to chip in for a training fund to be used in good times and bad to support training on each job. Apprentice limitation bottlenecks will have to be brokenbut there is little pressure to do that now. In good times, contractors are glad to have apprentices to supplement their labor supply, but they are quite willing to do with few in bad times when plenty of trained people are available. That must change. There must be incentives developed to lead contractors to press for use of apprentices in bad times as well as good.

One of the major bottlenecks lies in the fact that the usual publicly operated trade school will not take in trainees unless they are passed by the unions. That is the case with the Washburne Trade School here in Chicago. That must be changed. The enrollments in the trade schools must be doubled whether or not the unions agree to this. A small beginning toward this end has been made by the Federal government. It plans to train 35,000 servicemen in the construction trades in the next two years in its program of preparing draftees for release to civilian life. That is one of our major hopes. It is one program for which an addition to the Federal budget is appropriate. If it shows any success, we can hope that the program will be doubled.

I have dwelt at length on only two areas where we need action to improve the health of the construction industry. We should repeal the Davis-Bacon Act or, at least, obey the law as written instead of setting minimum construction wage rates, which are far above those prevailing in many areas to which they have been applied. This will do more to take the steam out of the rise in union rates than small changes in collective bargaining procedure.

We also must get to work to increase the supply of trained manpower. Unions have as much power as they do because of the scarcity of trained journeymen. When contractors are paying overtime to obtain manpower and get out the work, they are not going to be resistant to increases in rates.

Finally, if finance is to be availab'e for private construction, we must reduce governmental deficits. The capital drained from the economy to finance these deficits has cramped the construction industry. Federal appropriations must be trimmed, including appropriations for housing and urban renewal, if funds as well as manpower are to be available for private construction and the health of the construction industry is to be maintained.

[From the Washington Post, Apr. 15, 1972]

CONSTRUCTION INDUSTRY HAS DESTRUCT MECHANISM

BUILDING TRADES: FUELING INFLATION

(By Haynes Johnson and Nick Kotz)

"We built this nation," said one building trades official. And indeed the history of construction in America is distinguished by the fierce pride of skilled craftsmen, the rugged daring of rags-to-riches contractors and the solid structural accomplishments of 200 years.

Now, however, the construction industry is suffering. It is beset by grave internal illnesses that threaten to poison the entire economy.

"We may have killed the goose that laid the golden egg," admits Martin Ward, president of the Plumbing and Pipefitting Union, one of the 17 unions in the bui'ding trades.

For construction today is crippled by antiquated building codes, bloated by labor union featherbedding, ripped apart by violent union and nonunion struggles or disputes over job jurisdictions, constricted by union hiring hall monopolies and caught in a pervasive, inflationary web of greed.

These are stark assessments. But they come from labor union leaders, building contractors and captains of the biggest industries-men who admit contributing to the problems themselves.

Labor leaders, contractors and corporate executives now all say that the magic bubble has burst, exposing an inflationary, inefficient industry.

Listen to the insiders:

Robert Georgine, secretary-treasurer of the AFL-CIO building trades department: "We've got a serious problem of featherbedding, where two guys are assigned to a piece of equipment that only needs one. We have 'nail keg jobs where a guy just sits on a nail keg and watches the work. We have bull stewards' who do nothing but walk around."

Joseph Valdastri, business agent for Local 223 of the Sheet Metal Workers Union: "The biggest problem in the building trades today is unions fighting each other in jurisdictional disputes. The carpenters, for instance, take the attitude that Jesus Christ was a carpenter and that they were here first, so the rest of you guys stand in line."

"Contractors must share the blame," says the executive director of a Miami, Fla., contractors association. "As long as the contractor was making a buck, everything was fine. He just passed along the extra labor costs and made even more money himself in the process."

Virgil Day, vice president of General Electric Corp. and until recently a business member of President Nixon's Pay Board: "The corporate construction users are part of the problem. A corporation executive is told to get his new plant on line by some impossible date. So if there is a strike, he says: "Hell, don't fight it. I've got to have my building. I've got to have my overtime. I've got to have anything it takes to get that building up."

And finally there is the affluent consumer who wants his new recreation room built this month, not next month, and the wealthy couple who want to move into their Florida condominium apartment this winter, not next winter. They also help drive up construction costs.

RESENTMENT AMONG THE PUBLIC

The construction industry has stirred resentment in the rest of society among consumers who can't afford housing or a repairman, workers envious of the far higher wages paid construction tradesmen, and other union and business executives who feel that construction provides most of the gasoline for an inflationary engine which hurts everyone.