A call for repeal of Missouri’s prevailing wage law

Why is repeal called for? Prevailing wage laws increase costs borne by the state, municipalities, and school districts and transferred to tax-payers by:

  • artificial, high minimum wages
  • burdensome and expensive regulations
  • limiting competition

This is not complicated. It is basic supply and demand economics.

The most basic axiom of economics is known to us all:  IF YOU REDUCE THE SUPPLY – PRICES WILL RISE.  It’s that simple. Prevailing wage laws reduce the supply of competitive bids, significantly increase the total costs of projects, and indirectly increase the burden on taxpayers. Add in required record keeping (so the state can compute the “true” prevailing wage for each craft in each locality) and the net result is fewer bids from non-union companies and substantial unnecessary costs to projects subject to prevailing wage. All this is well documented in the academic community as are the fraudulent claims of harm if prevailing wage legislation is repealed.

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Please note that Wednesday there will be a hearing in Jefferson City by the Senate Interim Committee on Labor Reform, Senator Dave Schatz, Chairman. It will take place in the Senate Lounge at 1 pm. You can testify whether you will be present or not. Simply fill out this form:

http://www.senate.mo.gov/17web/wp-content/uploads/2015/10/WitnessAppearanceForm.pdf.

Scan and email it to Senator Schatz, at dave.schatz@senate.mo.gov

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Before getting into economic analysis below, I think it might be worth mentioning how unfair prevailing wage laws are. At least minimum wage laws, however harmful, apply to all workers. Prevailing wage laws apply only to construction workers. Both laws create unemployment, but prevailing wage laws tax all to benefit only a chosen, privileged few. How can this abuse of government power be called fair?

You won’t hear supporters of Missouri’s prevailing wage law mentioning unnecessary red tape or the unjust “transfer of wealth” effects of prevailing wage.  Instead they disguise the real effect of prevailing wage by suggesting that less experienced workers, higher injury rates, lower wages, less health coverage and the effects of “harmful competition” will result if the prevailing wage law is repealed. They will also speak glowingly about higher increased earnings and taxes and the economic benefit that accrues from the “spending cycle” which results, they claim, from the higher prevailing wage rates.

Proponents of prevailing wage will also claim that there is a downward spiraling “multiplier” effect to all wage earners when prevailing wage laws are repealed. This claim is sometimes backed by studies, commissioned by the supporters of prevailing wage, that disregard and ignore the economic value of the savings that accrue from the repeal of prevailing wage.  They ignore the fact that these savings, either in form of reduced taxes to citizens or reduced cost to the state, it will reenter the economic cycle for other uses: e.g., other labor projects, other purchases, other services, etc..

For example: One recent study claimed that repeal of prevailing wage in West Virginia would reduce construction income (wages) by $31 to $47 million and result in a total loss of $51 to $77 million in wages, after application of the “multiplier effect” (spending cycle).  This study also claims the reduction of income and sales tax revenue to West Virginia of $4.5 to $6.8 million. Such studies ignore the effect of the economic benefit (for wages and other expenditures) of alternative utilization of the savings on construction wages as well as the multiplier effect of such alternative uses.   In addition, the income and sales tax revenue that would be derived from these alternative wages and expenditures is ignored.

Intuitively we know that if all labor costs were to be increased by law, prosperity would be harmed, not increased. Aggregate prosperity is improved only by increasing productivity – not by increasing wages.   Increased wages, without an increase in productivity, only transfers wealth and reduces prosperity.  If the opposite were true you would need only to pass a law increasing the minimum hourly rate to $500 per hour and we would all get rich.

Proponents of prevailing wage also claim that all deficiencies or problems of prevailing wage laws can be cured by improving the “paperwork,” the reporting of wages used by the Missouri Department of Labor and Industrial Relations to calculate prevailing wage in each reporting area of the state. Utter nonsense.  First, as any contractor knows, unnecessary labor cost to “pick up a pencil” can increase the cost of construction just as much as an unneeded carpenter picking up a hammer.  It’s the equivalent of government forced “featherbedding”. No one is motivated to add unneeded cost to his overhead and will do so only when forced to by law.

I would like to address two other claims made by prevailing wage proponents in Missouri:

  1. That prevailing wage laws produce “fair and competitive” bidding:  This is a twist on the preposterous claim, often used by proponents of prevailing wage, which maintains that the construction industry is uniquely subject to “harmful competition” that slashes wages and reduces standards. Thus when wages are set by law that such harmful competition is limited. A claim of emotional argument, not objective analysis. Think about it and logic alone will tell you that if the wage portion of a contract is fixed and a low bid is secured, contractors will just as likely look to reduce costs in other areas. Thus grade B materials are used instead of grade A.

It is construction management, performance bonding, monitoring and oversight of construction specifications that ensure that quality and other construction standards are met – not the wage rate.

  1. Lack of prevailing wage laws promotes “unskilled workers”: Proponents of prevailing wage laws maintain that in their absence the training of construction workers is inadequate.  The inference is that the industry depends on unions for an adequate supply of trained workers. There is no evidence that there is more of a market failure in the training of construction workers than in the training of workers for any other occupation group. There are community colleges, private technical institutes and other training resources besides labor unions. In addition there is on-the-job training for less skilled “helpers”, who abound in free market construction contracts. With prevailing wage contracts contractors are motivated to hire union workers rather than less skilled helpers due to the cost disparity between the prevailing pay rate that they are forced to pay and the productive value of helpers.

These and other claims advanced by the supporters of prevailing wage laws are a complete disguise of their real PURPOSE: TO LIMIT COMPETITION BY THE FORCE OF LAW.  This purpose applies to both sellers of labor and sellers of construction contracts. The sellers of labor (unions and other labor organizations) want to limit the competition from others who might offer their labor at a lesser price; and sellers of construction contracts want to limit bidders to only those who pay comparable wages as they do, whether by force of union contacts or the force of prevailing wage laws.

Why is the real purpose (limited competition) disguised behind all these claims? As anyone with the most basic understanding of the way markets function knows: when competition is limited prices rise. It’s basic “supply and demand stuff.”  Added costs due to increased wages are paid by Missouri taxpayers. This results in fewer and lower quality government buildings and infrastructure or other “goods and services” than would otherwise be possible with free-market bids.

Of course proponents of prevailing wage can’t sell a prevailing wage scheme on the singular purpose of raising labor costs so they must attempt to justify the law with false and misleading claims.

 

There are many economic studies by scholars with no dog in the fight that debunk the claims by proponents of Prevailing Wage. You need only rely on your own economic knowledge base to determine that buyers love competition and sellers hate competition.

Reduced competition is what the sellers of prevailing wage are seeking. Don’t buy their flawed arguments that disguise the hidden purpose of Missouri’s prevailing wage law.    

Bruce Hillis

Mexico, MO 65265

573.380.1132 brucehillis@charter.net

August 13 , 2017

 

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High-school boy has “right” to shower with girls

Updated 4th November here.

The madness of creating ‘rights’ to satisfy the whims and claims of privilege of every self-proclaimed aggrieved minority group or psychologically disordered individual has led, per the New York Times, to an attack on sex-specific showers in our high schools.

Thus a high-school boy claiming transgender status has been accorded the pronoun ‘she’ and the right to play on the girls athletic teams. The suburban Chicago school district, mindful of Federal might, has given him a separate section in the locker room in which to shower. The Feds, however, find this discriminatory because he does not have the choice to shower naked with the girls. Clearly government bureaucracy crushes any sense of humor as this position – the dream of every high-school boy – does not pass any normal kind of test, smell or otherwise. In the Alice-in-Wonderland upside-down world of government, where the common-sense meaning of words is changed at will and we are expected to follow, most of us have no rights, except the right to surrender to the latest outrageous demand of radicals encouraged by their recent legal victories over traditional values and our American sense of decency. The diseased tail will continue to wag the still healthy dog until our governments at all levels are thoroughly disinfected and reformed.   Troglo

Troglo

CON jobs and collusion

Our human nature leads us to believe that as good people we of course accept that rules are for everyone; it is just that we are special cases. Tax preparers are used to the complaints that this rule is unfair, it should not apply to me; or I am poor, I shouldn’t have to pay that. Economists hear this whine: I believe in competition in general, but my industry is a special case, to wit:

  • We need to work together – cooperation – not competition
  • My competitor wants to cherry pick the most profitable parts of my business
  • I can handle any increase in demand just fine
  • Competition will hurt my industry & increase costs
  • I bring all kinds of benefits to my community
  • Sometimes we hear this argument: My competitor is for profit, whereas I wear the not-for-profit halo

Economists think of another word whenever they hear voices urging cooperation, collaboration, or working together in place of ‘destructive’ competition. That word is collusion.

This blog has written here about the Missouri Certificate of Need (CON) laws and urged their repeal. We write again because all the excuses just listed came up before the Missouri Health Facilities Review Committee which decided the heavyweight contest between the two biggest hospital systems in central Missouri.

Much misinformation centers around the idea that somehow competition or capitalism does not benefit the health care industry. Little justification is ever given besides the brazen contention that the free market is responsible for our healthcare woes. In fact, we haven’t seen anything like a free market in health care for generations; the villain is bad government regulation.

Our favorite excuse is that my competitor is just cherry picking the most profitable parts of my business, as if it were not rational and good business to expand into the most profitable new areas. It strikes us as disingenuous and hypocritical for one to say that state power should be used in the public interest so that I keep my dominant position in the most profitable areas. It is not in the public interest that a hospital’s cash cows should be exempt from competition. Here as elsewhere competition will normally lead to more consumer choice, lower prices, higher quality of service, or all three. Oligopolies, not known for innovation, love sanctioned ‘collaboration’ that keeps potential competitors out of their markets.

Another bogus claim is that productive cooperation is not possible without protection from competition via the CON laws. To the contrary, competition will lead to better cooperation through specialization. One hospital could have a great burn unit, another well known expertise in open-heart surgery. It would normally be foolish for one to compete in the areas of the other’s great strengths; this can lead to sensible competition in the remaining areas, to everyone’s benefit.

Competition will increase costs??? Economists love this excuse because it conceals the true benefits of competition. To compete of course requires some investment or capital costs. But once these are in place the benefits will show themselves in reduced costs, higher quality, & so on. Conversely, keeping competition at bay via state law will enable a hospital to keep chugging along with no incentive to reduce costs.

We have noted earlier that the original motivation for the CON laws was to keep the spigot of Federal money open. That changed three decades ago, but the CON laws have not been repealed in many states. The reason is that CON is very useful in inhibiting competition. Ph.D. economists and attorneys with long experience in the antitrust area at the Federal Trade Commission and the Department of Justice have written about the CON laws. An excellent article from the Goldwater Institute summarizes the consensus and includes many useful references. Below are the highlights:

  • Medical costs are 11% higher in CON states
  • The Federal Trade Commission found in 1988 that “repeals of CON programs would not lead to increased hospital costs”
  • CON states have 99 fewer beds per 100,000 population and lower availability of MRI services, CT scanners, and optical and virtual colonoscopies.
  • In 2008 the Federal Trade Commission and the Antitrust Division of the Department of Justice wrote: The Agencies’ experience and expertise has taught us that Certificate-of-Need laws impede the efficient performance of health care markets. By their very nature, CON laws create barriers to entry and expansion to the detriment of health care competition and consumers. They undercut consumer choice, stifle innovation, and weaken markets’ ability to contain health care costs. Together, we support the repeal of such laws, as well as steps that reduce their scope.

For perspective we note that the Federal government is also in the business of restraining competition. Since 2010 the Feds have approved only a single new bank, just one, not the hundreds we would normally expect; (see here) while the Dodd-Frank disaster harms small and midsize banks and secures the dominance of the large ones. The latter, without competitive pressure to strengthen them, will tend to become “too big to survive.”

Our advice is for all committees and commissions responsible for implementing CON laws to ignore anti-competitive opposition. Perhaps one day legislatures will have the public spirit to put together a mammoth bill repealing all anti-competitive laws and regulations, including CON and franchising laws, along with occupational licensing laws, all of which inhibit economic growth and generally harm the public interest.   Troglo

Troglo