The Wage Differential Method: Promising Construction Costs Savingswith the Repeal or Weakening of Prevailing Wage Laws that Cannot be Delivered

Abstract

The controversy over prevailing wage laws centers on whether these locally determined minimum wage rates increase construction costs. The wage differential method is commonly used to measure the cost effect of this wage policy. This study provides a step-by-step illustration of this approach through an examination of Davis-Bacon prevailing wage requirements and the cost of highway resurfacing in Colorado. This application of the wage differential method indicates that prevailing wage requirements add anywhere from 7% to 17% to project costs. The results of this illustration are compared to three studies that examine the same wage policy and projects, but are based on the statistical analysis of project data. These studies provide a comprehensive analysis and find consistent evidence that project costs are not related to prevailing wages. This illustration reveals the inherent flaws of the wage differential method and the need for a researcher using this approach to rely on assumptions, estimates, and inappropriate data. The result is a promise of construction cost savings with the repeal or weakening of prevailing wage laws that cannot be kept. The study also includes a critical review of existing wage differential studies and how this approach has been addressed in fiscal policy notes.