In 1931, the Davis Bacon Act (DBA) was passed. According the FAR 22.403-1 “The Davis-Bacon Act (40 U.S.C. 3141 et seq.) provides that contracts in excess of $2,000 to which the United States or the District of Columbia is a party for construction, alteration, or repair (including painting and decorating) of public buildings or public works within the United States, shall contain a clause (see 52.222-6) that no laborer or mechanic employed directly upon the site of the work shall receive less than the prevailing wage rates as determined by the Secretary of Labor.”
The DBA applies to all contracts over $2,000. This amount was set in 1931 and is equivalent to $30,652.24 in today’s dollars, although the limit still remains at $2,000 (83 years later).
Prevailing wages are defined as the “hourly wage, usual benefits and overtime, paid in the largest city in each county, to the majority of workers, laborers, and mechanics.” They are developed from surveys and collective bargaining agreements. In short, prevailing wages tend to mirror union wage rates (the goal of which is to not allow unions to be underbid in bids). As with all minimum pricing schemes, this tends to inflate the cost of government contracts. One source claims that repealing the DBA would save the taxpayers $10.9 Billion dollars annually. Those dollars could be used for other projects.
To illustrate this cost markup from personal experience, I once talked to a private sector businessman who built a luxury apartment complex for $40 million dollars, half the price of what the government paid for a building that was only half the size and less luxurious (the government job was four times as expensive!). Part of this cost differential is due to the DBA.
The DBA was specifically passed to limit the job opportunities of low skilled workers. To understand the purpose and effect of the Davis Bacon Act, a primer on economics is necessary. For any construction job, the job can be accomplished utilizing a wide array of labor mixes. Hypothetically, a roof might be shingled in a day by 4 skilled workers, or shingled in a day by 8 unskilled workers. The owner of the house has incentive to take the cheapest route to accomplish this task. Although 4 workers might work more productively than the 8, if the 4 workers are more than twice as expensive then the owner possibly would choose to employ the less productive workers. The owner might even accept lesser quality work if the premium on more quality-focused labor is too high to justify the cost.
Where productive labor can be accomplish by the less productive, there is potential for governmental interference in the market to force employment towards the productive labor. Traditionally that has taken the shape of minimum wage laws, coerced union “agreements”, and laws such as the Davis Bacon Act. What all these do is price out the low productivity competition. If those 8 workers had to be paid the same price as the 4 more productive workers, no longer would there be monetary incentive to hire the 8 workers.
In history, the less productive workers have traditionally been drawn from minority classes. These types of wage initiatives have traditionally been advocated by full and open racists. These racists argued precisely that these laws were needed to protect against “colored” labor. Walter Williams writes that the minimum wage laws (the DBA is a federal minimum wage on construction contracts) are the most anti-Black laws that were ever enacted. In today’s world, these laws disproportionately discriminate against those of Latino descent. Similar laws, such as worker verification laws, are regularly passed expressly to discriminate against “illegal” immigrants, who provide cheap competition to contractors.
The overall effect of the Davis Bacon law is textbook economics. Artificially increasing the cost of goods or services causes what is known as Dead Weight Loss to the economy. The economy is overall less productive, and the nation is more impoverished than it otherwise would have been. Jobs are lost as low skilled labor is priced out of certain markets, forced into others or withdrawn altogether.
Other losses to the economy are evident in the bureaucracy that maintains and enforces the DBA. Currently, significant resources are spent gathering data and enforcing wage rates. The Department of Labor reports that in Fiscal Year 2014, $613,794,000 was spent on Bureau of Labor Statistics and $3,555,132,000 was spent on “Worker Protection”. This spending and the “labor” of these employees represent negative impact to standard of living, because the entire purpose of these activities is to impede production (which in turn impedes consumption). These costs are understated because it does not include judicial costs, externalities of regime uncertainty, special interest lobbying and related administrative costs.
The Davis Bacon Act should be repealed. The cost of government construction would decrease significantly. The number of low skilled workers would increase (more jobs would be created). The wages of unions would decrease (as they would have to provide competitive quotes). Government projects would increase (as more money would be available for use), and Americans would be able to consume more than they otherwise would have. Socially, there would be less racial discrimination as government would hire more minority workers and force racists to confront the fact that minorities can complete jobs satisfactorily. Bureaucratically, the government would exhibit less control over people’s lives, special interests in turn would have less incentive to lobby, and freedom would increase.
Table 1.1 (Image stolen from here)
Description: The DBA is a Federal Minimum Wage on Construction Contracts; this chart illustrates the effect on employment. The Triangle that is formed by L2, the Supply Curve, and the Demand Curve is known as “Dead Weight Loss”. Deadweight loss is the total consumer surplus (wealth) and producer surplus (wealth) that is lost as a result of an artificial increase in price. W0 is the wage level in a competitive environment without the DBA. As the Minimum Wage (DBA) increases, the size of the Deadweight Loss increases and the size of the unemployment effect grows. The only way the DBA could not have negative employment effects would be if the Equilibrium rate exceed the DBA rate, in which case the DBA would not be needed. The difference between L2 and L0 are workers that would have had a job if not for the DBA. The difference between L0 and L1 are workers attracted to the higher wages but are unable to find employment.