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STUDY: Repealing MI Prevailing Wage Would Cut 11,000 Jobs, $1.7B from GDP, $700M of Investments

Michigan workers are in a perpetual state of battle with extreme legislators

Michigan workers are in a perpetual state of battle with extreme legislators.

A new study titled The Cost of Repealing Michigan’s Prevailing Wage Policy provides new data about the law’s true impact on total construction costs and economic activity.  As we wrote earlier this month, despite the incredibly strong voter support for the current prevailing wage law, the state GOP is pushing a repeal agenda.  The new study shows that repeal would kill jobs and hamper the state’s economy.  

Repeal supporters often argue that the prevailing wage inflates labor costs.  But these new numbers suggest the prevailing wage is invaluable given the higher production it brings.  Workers are anywhere from 11-30% more productive in states that have prevailing wage laws.  Using U.S. census economic data, the report asserts that repeal would result in the loss of 11,000 jobs and $1.7 billion in state GDP. Additionally, $700 million of new construction investment would move out of state.

From the executive summary:

The belief that reducing wages will reduce costs is based on an incomplete understanding of the construction industry. A fundamental problem with this assertion is that labor costs are a small share of total construction costs. For the types of projects covered by Michigan’s prevailing wage law, labor costs and benefits are approximately 20 percent of total costs. It is simply not possible to obtain substantial savings from a cost component that is such a low percentage of the total. Economic research that is summarized in this report indicates that the use of skilled construction labor is very sensitive to wage rates. As wages decrease, less productive employees replace more skilled craft workers. Manual labor is also used instead of productivity-enhancing capital equipment. In a comparison of states with “weak” or no prevailing wage laws to states that have “average” or “strong” laws (like Michigan’s), value added per construction worker is 11 percent higher in the states with effective wage policies. Also, material and fuel costs are about 3 percentage-points lower in these states.

An elimination of prevailing wages is accompanied by a variety of undesirable changes that tend to offset, or cancel out, the intended savings associated with cutting wage rates. These findings are consistent with the overwhelming majority of research by economists indicating that the costs of building public structures such as schools, highways, and street and sewer projects are unaffected by the presence of municipal, state, or federal prevailing wage laws.

Following the release of the study, co-author Frank Manzo of the Midwest Economic Policy Institute, said:

“Comparing data from prevailing wage and non-prevailing wage states shows repeal of the standard in Michigan will be a bad bargain for taxpayers.  There are no savings because reductions in construction wages are offset by decreases in workforce productivity, less worksite efficiency, and increased spending on energy and materials.”

The study also examined the “ripple effect” that repeal would have. According to study co-author and Colorado State University Economist, Kevin Duncan:

“Every sector of the economy would feel the impact of prevailing wage repeal.  This would be a self-inflicted wound that suppresses economic activity, exports hundreds of millions of construction dollars out of state, and puts thousands of people out of work.”

Duncan added:

“Less economic activity and fewer people working for lower wages translates to more reliance on public assistance programs and lower tax revenues.  There are only two ways to close that gap-raising taxes or making even deeper cuts to vital public services.”

Smart Cities Prevail researcher Alex Lantsberg noted the importance of studies supporting the prevailing wage while a misinformation campaign is being orchestrated from the far right:

“There is a reason why prevailing wage policies have stood the test of time and have long been embraced by leaders in both political parties-including Michigan’s Republican Governor Rick Snyder.  Our goal is to ensure that voters and policymakers have the facts they need to make informed decisions that reflect the best interests of taxpayers and the economy as a whole-and our research shows that repeal of prevailing wage falls far short of that standard.”

Michigan’s GOP is in a particularly anti-worker spiral at the moment. The state Senate is considering bucking the national trend of granting minimum wage hikes, instead recommending that the law be changed so that young workers earn less.  

International Business Times explains:

The Michigan Senate is considering a proposal that would extend the state’s youth minimum wage, at present $6.29 an hour and covering only those 16 and 17 years old, to include employees ages 18-20, who are currently entitled to receive the statewide hourly minimum of $8.15. In real terms, that’s a pay cut: If the proposal became law, workers aged 18 to 20 would earn the federal minimum of $7.25, since state rates cannot undercut the federal one. (The state’s youth hourly minimum rate is 85 percent of either the federal or state pay floor, whichever is higher.) Approved by a committee last week, the bill awaits action by the full Senate, where Republicans hold a comfortable majority.

Supporters of the law, which include the right-leaning Michigan Chamber of Commerce and the Michigan Restaurant Association, argue that it “would make it easier for young people to gain footholds in the job market.”  Critics disagree, labeling the move “illogical and exploitative.”  Speaking to The State News, Michigan State University’s student newspaper, State Sen. Curtis Hertel Jr said of the GOP plan:

“We’re all the sudden taking people who have reached the age of adulthood, who have graduated high school, who are in college, who are struggling to pay their bills and struggling with the increased cost of college, and saying to those people that ‘We can pay you less,’ and to me it makes no sense.”

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