Democratic Party control of the state Senate has breathed new life into initiatives long blocked by the Senate’s Republican leadership. Rochester Assemblymember Harry Bronson just resubmitted his bill expanding the application of New York’s prevailing wage law to any construction that involves a public-sector incentive.
Moreover, Gov. Andrew Cuomo expressed support for an expansion of prevailing wage in his Jan. 15 State of the State address, saying that “project construction with public subsidies should be subject to the prevailing wage so they’re built right, they’re built fairly and they’re built union.”
What is the prevailing wage? How would Bronson’s bill expand its application? Who wins and loses under this initiative?
Currently, New York’s prevailing wage law applies only to construction actively undertaken by a public entity. The legislation proposed would expand the definition of “public work” to any project receiving state tax credits or tax abatements conferred by local development agencies or public-sector loans or where the facility is expected to be leased to a public-sector entity. This is a significant expansion of the law.
Prevailing wage laws intended to promote fair pay
Prevailing wage laws were established as a way to promote fair compensation in the construction trades. In 1927, a contractor on Long Island imported workers from the low-wage South, undercutting local labor. In response, the federal Davis-Bacon Act that passed in 1931 requires that federal construction projects pay the market wage received by most workers in that trade within that region—the prevailing wage. Many states followed suit, including New York in a 1938 constitutional provision. Article I, Section 17 of the state Constitution reads:
No laborer, worker or mechanic, in the employ of a contractor or sub-contractor engaged in the performance of any public work, shall be permitted to work more than eight hours in any day or more than five days in any week, except in cases of extraordinary emergency; nor shall he or she be paid less than the rate of wages prevailing in the same trade or occupation in the locality within the state where such public work is to be situated, erected or used.
Like most mandates, this one has a laudable purpose—that of increasing worker wages. The idea is that the law shifts income from “capitalists”—the developers—to “workers.” It simply changes who gets the money.
The application of prevailing wage to all private construction receiving any form of support from the state or localities, as proposed in the Bronson bill, will increase the unit cost of labor for all affected projects. As reflected in the governor’s remarks, prevailing wage legislation is also intended to shift work to union labor from nonunion labor.
The state’s economic development community fears that the Bronson bill would force prevailing wage and union labor on all projects receiving local property tax abatements or state tax credits. As a large share of business relocations and industrial expansions currently receive some kind of tax break as an incentive to locate in New York, a construction cost increase would either make the state less competitive or increase the need for outright subsidies to offset the cost increase.
At issue is whether increasing the unit cost of labor will increase total project cost. Union leaders argue that union labor is more productive, thus overcoming the increase in hourly cost.
Prevailing wage in state law
New York’s constitutional provision is implemented through Section 220 of the state Labor Law, which applies to construction, reconstruction or maintenance work funded and performed on behalf of public agencies, including the state, municipalities, school districts and public authorities.
At the federal level, the prevailing wage established under Davis-Bacon is determined by employer surveys. The federal Department of Labor is directed to set the prevailing wage equal to the wages and benefits paid to at least 50 percent of the workers in any given locality, as determined by the survey.
By contrast, Section 220 states that New York’s “prevailing rate of wage” be equal to compensation levels set in “collective bargaining agreements between bona fide labor organizations and employers in the private sector” when a union contract covers at least 30 percent of “workers, laborers or mechanics in the same trade or occupation in the locality where the work is being performed.”
In practice, the 30 percent threshold is not tested by the Labor Department. The union rate is simply adopted for all trades and localities. Prevailing wage opponents believe that the 30 percent threshold for union representation is almost surely not met in many localities and trades. The legal burden falls entirely on employers to prove that union employment falls below the threshold, however. Fighting these rates is difficult as the union contracts that are the basis of the Labor Department calculation are not fully accessible to the public.
Not just wages
In addition to wage and benefit rates, New York’s statute embraces both “supplements” and “prevailing practices in the locality” as “provided by virtue of collective bargaining agreements.” The cost of these benefits and supplements typically start at 40 to 50 percent of base pay, often double the average outside the union context.
In effect, prevailing wage mandates the entire set of collective bargaining agreements negotiated by individual union locals. This encompasses idiosyncratic clauses in every contract, including listed paid holidays, specific requirements for vacation pay, the method of calculating payments for benefits and many other compensation-related provisions that can differ among different trades. For example, carpenters, plumbers and electricians working on the same job could have a different set of required holidays, all of which must be enforced under the prevailing wage law.
Further complexity is introduced by the structure of pension plans for construction union labor, many of which are seriously underfunded. E.J. McMahon of New York’s Empire Center for Public Policy has summarized the union pension issue in our jointly authored “Prevailing Waste: NYS’s Costly Public Works Mandate.”
While state law does not formally require contractors to employ only union members, the law has this effect with larger projects. Not all public construction projects employ union labor exclusively, but the pressure to do so is considerable. The use of union labor brings with it contractually dictated union practices and work rules plus jurisdictional agreements among union locals that can affect productivity.
The division of labor into specialized tasks can powerfully boost productivity and economic growth, as Adam Smith was among the first to recognize. However, inflexible and arbitrary divisions can also introduce friction into the worksite, reducing productivity.
For example, union rules typically grant operating engineers “jurisdiction” over the running of elevators in buildings under construction—even when the elevator installation is complete and are fully automated. Thus carpenters, plumbers, electricians and others working on the 20th story of an office tower must rely on an operating engineer to push the elevator buttons for them. Similarly, construction laborers or appliance store deliverymen are not allowed to “install” refrigerators. This work more commonly falls under the jurisdiction of the plumbers—which, on covered projects, means that the cost of installing a new refrigerator can be higher than the cost of the appliance itself.
The Empire Center’s “Prevailing Waste” report includes an estimate, by region, of the average wage earned by all workers in the construction trades versus rates paid under prevailing wage. The differential due to prevailing wage ranges from 57 percent in Albany to 95 percent in New York City. In Rochester, the construction trade average wage and benefits is estimated at $28 per hour compared with $44 per hour paid under prevailing wage.
What’s the bottom line?
There is no disagreement that prevailing wage requirements increase the unit cost of labor. That is the intent. The debate centers on whether the increase in unit labor cost also increases the total cost of construction and, if so, by how much. Again, union supporters argue that the increase in unit labor cost is offset by an increase in productivity.
To assess the potential impact of imposing a prevailing wage mandate on affordable housing projects, the New York City Independent Budget Office recently studied the cost of 22,157 affordable units, 5,856 of which were subject to the prevailing wage law.
IBO concluded that total construction cost increased by 23 percent when a developer was required to comply with the prevailing wage mandate. Requiring prevailing wage across the board would add $4.2 billion in costs to Mayor Bill de Blasio’s plan to building 80,000 affordable housing units.
Given the quality and quantity of data available to the IBO under its NYC Charter mandate, this may be the most robust and reliable study of prevailing wage ever conducted. Its approach does not simply look at different rates of pay but incorporates the variation in labor productivity. Union supporters argue that union labor’s higher cost is more than offset by higher productivity, which the IBO study refutes.
A white paper issued in 2012 by Columbia University’s Center for Urban Real Estate took a dim view of the methodology used to develop New York’s prevailing wage schedule and concluded that “because prevailing wage mandates add 25-30 percent to the cost of development, they should not be extended to currently uncovered sectors, such as affordable housing, which is not public construction and which already faces soaring costs and a shortage of financing, or industrial development agencies (IDAs).”
Both the IBO and Columbia University studies should be required reading for policymakers considering the Bronson bill.
Finally, the Empire Center’s 2017 “Prevailing Waste” report (with CGR participation) adopted yet another approach to measuring the cost impact of prevailing wage and came to similar conclusions:
- State and local government construction costs are inflated by New York’s prevailing wage law, which requires contractors on public projects to pay their workers the amounts required by union collective bargaining agreements.
- The “wage” mandated by the law includes expensive union fringe benefits, which can approach or exceed the cost of hourly pay.
- The law also effectively requires contractors on public projects to organize and assign work as required by inefficient union rules.
- The law drives up total construction costs by 13 to 25 percent, depending on the region, which will translate into billions of dollars in added taxpayer-funded spending under current multi-year capital plans.
- The law is supposed to apply only when union contracts cover at least 30 percent of the workers in a given building trade in a given “locality”—but the state Labor Department doesn’t verify that the threshold is being met, and localities are defined on the basis of union jurisdictions.
From nonunion labor and taxpayers to union labor
Fair pay is a laudable goal. Forcing union wage scale, benefits and jurisdictional monopolies on a wide range of new economic activity, however, enriches one group of workers at the expense of other workers and taxpayers.
New York’s economy, particularly upstate, suffers competitively with the rest of the nation. The city of Yonkers in Westchester County recently performed a real-world experiment that makes this point rather vividly.
In December 2017, the Yonkers IDA adopted a policy requiring union project labor agreements for any project exceeding $5 million. A year later, Mayor Mike Spano declared the program was “a dismal failure.”
This occurred in the context of a booming downstate economy. A vibrant economy will improve opportunities for the entire workforce. Driving up the cost of private construction projects will slow economic growth and leave the state less able to employ its citizens.
Dueling views on the prevailing wage bill
Given the stakes involved in the legislation to expand New York’s prevailing wage law, it is hardly surprising that supporters and opponents are expressing strong views on the matter.
Assemblymember Harry Bronson, sponsor of the legislation, offered the following statement:
Having the governor include the importance of paying prevailing wage in his State of the State address is encouraging. A strong prevailing wage policy allows our construction workers and their families be part of the middle class. Contrary to the Empire Center’s report, paying workers prevailing wages on public works projects will not dramatically increase the costs of such projects because labor costs are a relatively low proportion of total costs, representing approximately 24 percent of the cost of projects in New York State. Using a wage-differential approach is a simplistic mathematical way of manipulating data to achieve a hyperbolic headline, and ignores the fact that 82 percent of peer-reviewed research on school, highway, and other building construction indicates that prevailing wage does not significantly increase costs because of cost savings in other areas of a project’s costs. Defining public works and paying workers on such projects a prevailing wage will ensure New York meets its constitutional obligations. In addition, this policy ensures more money goes into the pocket of New York’s hard-working families, rather than out-of-state contractors and laborers.
Victor Salerno, CEO of IBEW-affiliated O’Connell Electric in Victor, the fourth-largest electrical contractor statewide, also voices vigorous support for the Bronson bill:
In response to your Jan. 1 inquiry regarding the Harry Bronson proposed bill regarding expansions of the prevailing wage regulations to private projects receiving some form of state or local incentives, we are in a very unique position to respond. This is based on the fact that O’Connell Electric is the fourth-largest electrical contractor in the state and 37th in the country with +/- 800 employees, performing +/- $250 million of work with electrical workers since our founding in 1911 that are represented by the International Brotherhood of Electrical Workers (IBEW).
First and foremost, I take complete exception to the cost increase of anywhere from 15-25 percent with prevailing wages. This is not possible as in general, the total labor component on most jobs is in the 25-30 percent range and I will say for the most part because of our “GREAT” five-year apprentice training program and “world class” safety efforts (O’Connell has five full-time safety managers and several others assigned to specific large, complex projects) that our labor productivity should be at the top of the industry. Our company recently acquired a 22,000-square-foot building to assist us in expanding our prefabrication efforts increasing production; we are now able to perform many tasks in a factory environment much more efficiently versus the job site. Sometimes you do get what you pay for.
We would have to not include any of our labor to get to that kind of a result.
As a point of interest, our industry is extremely competitive no matter if we are bidding against other union or non-union contractors. With our apprentice program we are able to nicely average our labor rate down using a mix of journeymen and apprentices, depending on the complexity of the project. Approximately 80 percent of our work is private non-prevailing-wage projects where owners have the option to choose a non-union contractor but instead choose to use O’Connell because of our skilled workforce, productivity and safety.
From the standpoint of “getting what you pay for,” I point out that all of our employees are provided health care insurance and retirement benefits and therefore will not become a later burden to society.
On the opposing side, Heather Briccetti, president of the Business Council of New York State, told the Beacon:
Much of upstate is still struggling to not just grow jobs, but to recover jobs lost in the great recession, and is suffering from a dearth of private-sector investment. Even with recent state assistance efforts, upstate continues to lag behind national, and downstate, job growth trends, for a variety of reasons, including state-imposed costs and regulations. Adding additional costs to economic development efforts will simply be counterproductive. Moreover, the purpose of prevailing wage laws isn’t to guarantee union employment but to protect local wage levels, and in a number of upstate regions public works prevailing wage rates, and benefits, significantly exceeds actual average wages for many occupation categories. This bill doesn’t just impact business, it would apply to a wide range of nonprofits that provide crucial social services and quality-of-life benefits to the communities they serve, and a prevailing wage mandate will impact their ability to invest in facilities and expand services. Finally, a prevailing wage mandate can’t be considered in a vacuum, but has to be considered in the context of existing, recent and proposed labor law mandates imposed on private and nonprofit employers. Whether wage mandates, or leave mandates, or scheduling mandates, or others, they all impose direct, administrative and/or compliance costs, and make managing a business or nonprofit in New York more challenging. We hear from a wide variety of businesses and other organizations expressing opposition to this additional wage mandate.
Brian Sampson, president of Associated Builders and Contractors, New York Chapter, added the following comment:
Few of the big private projects in Rochester would have happened, had the contractors been obligated to pay prevailing wage. Or, to make them happen, the state or county would have had to increase the incentives offered substantially. Economic development is as much about improving the quality of life in a community as it is about creating jobs.