Saturday, April 16, 2011

Do prevailing wages help or hinder our recovery?

Do prevailing wages help or hinder our recovery? For the uninitiated, prevailing wage requirements establish labor costs on construction projects at levels which closely track local union wage rates. More often than not these levels far exceed the market level of pay (by as much as 40%) for skilled labor in the same locales.
On one hand, workers receiving more pay will spend more back into the community. Call this the Aggregate Demand Argument. And on the other hand, more capital is exhausted per unit of prevailing wage labor. Meaning less work is accomplished, productivity is diminished - value destroyed. Call this the Free Market Argument. The outcome of these arguments is important because it determines the pace and strength of our recovery.

The impetus for prevailing wages owes its roots to the "Progressive Era" which brought child labor and workers compensation laws to the fore, reaching a crescendo with the Davis-Bacon Act (DBA) of 1931 which established prevailing wage requirements for Federally funded projects - required on projects receiving $2000 in federal funding or more. It was thought that DBA and the prevailing wage laws in 32 states would ensure only local skilled mechanics would be engaged on projects of public import both large and small while preventing migrant contractors using who knows what for labor.

In reality while the rules do prevent a race to the bottom in terms of wages paid, they create an onerous competitive barrier for scrappy upstarts like yours truly, a highly skilled tiler. This is true now as it was then when the concern at the time was toward upstart "Negro"-owned contractors or small contractors utilizing "Colored" labor encroaching on the market share of the larger more established white-owned unionized contractors. Likewise the history of building trade unions is similarly checkered toward African Americans. While this post is not about institutionalized racism within the construction industry, the facts illustrate how prevailing wage laws are more of a big-business protectionist policy paraded about in a "Pro-Labor" wrapper. It is well known that protectionism adds costs to and limits opportunities for society.

From this Friday's Wall Street Journal:
Currently, lawmakers and governors in 21 states are seeking to limit the use of prevailing wage requirements. The proposals open another front in a battle pitting Republican legislators against unions, and push the debate further into the private sector. One of the biggest changes has been proposed by my governor, John Kasich of Ohio. His budget proposes eliminating prevailing wage requirements for public universities and for local and many state government projects under $5M as opposed to the current hurdle of $78,258..."There are fewer resources in the state right now so government needs to optimize every dollar," said Rob Nichols, a Kasich spokesman..."Prevailing wage artificially inflates the cost of labor construction in the public sector," said Bryan Williams, director of government affairs at the Ohio chapter of the Associated Builders and Contractors, a trade group that backs bills curbing the rates. [representing smaller contractor businesses] The Ohio Contractors Association, made up of 90% union contractors, and the Associated General Contractors, with 55% union membership, oppose changing the laws. [both represent larger contractor businesses]
Why does this impact the pace and strength of the economic recovery? Up until this last recovery, housing has led the charge. I disbelieve the recovery thesis. And if you are underwater in your home, have seen little appreciation in your pay over the last decade (perhaps even took a pay-cut a few years back), or are close to a hardworking someone now out of work, then you are probably disbelieving the recovery thesis too. I believe we are more likely engaged in some sort of zombie recovery where the talking heads are ignoring the lack of a housing recovery. In fact housing is one negative monthly report away from being a double dip recession. Rather the pundits are postulating that perhaps we can have an overall recovery without a turn in housing.
For a while you can so long as you have a Federal Reserve to back it up, but the consequences on those of us who live paycheck to paycheck cannot be denied so long as the price of food and fuel continue to escalate. I think the Fed and the wealthy elite are out to destroy us. And, I doubt pundits can continue to ignore the impact this housing depression is having on their recovery.

Is the answer striking down state prevailing wage laws and the federal Davis-Bacon Act? It's not quite clear especially given that housing is traditionally put in place nonunion low overhead trade contractors like myself. But when you consider the residential construction market is but a fraction of its size from its peak in 2006, there are literally tens of thousands of displaced small businesses with over a million highly skilled workers who could easily convert their target from housing to commercial work if not for the barrier of prevailing wages. Are not small businesses the engines of US job creation? And, does their workforce not deserve a right to work? Was not their skill level sufficient and safe enough for you to live with in your own home?

Prevailing Wages are Retarding Growth and Job Creation in my Hometown Toledo, OH:
a Case Study

I'm following the Toledo Blade's coverage of Mayor Mike Bell and the Dashing Pacific Group's attempted acquisition of the Marina District Property. (here) and (here). The city owns a significant stretch of undeveloped prime riverfront real estate. Up until this week it had a willing buyer/developer who sketched out a $200M residential light commercial development plan that would attract a diverse, moneyed, and international clientele. I can just imagine the amount of tile that will go into this development. Now what happened is a good deal hatched between mayor Mike Bell and DPG is falling through because city council wants to put a deed restriction in place which would require prevailing wages. For over ten years, the property has been a development target by various developers, most recently by Dillin Corp. - a local developer who flew high on leverage with the lovely Levis Commons development (a union only project), but is now in the dumps in this our post real estate credit bubble collapse. No doubt he is in the dumps because the cash flows from current rents do not justify his prices paid for union labor. The main point here is DPG is stepping away from the deal. Good for DPG bad for Toledoans.

What we have here is binary, on or off. With prevailing wage restrictions, no deal - no jobs. Without restrictions, the deal lives and the jobs prospect follows.

Score: Aggregate Demand Argument 1 Free Market Argument 0.

In the article, Mayor Bell rightly raised questions about Toledoans' understanding of the Global Marketplace. I agree. We have a great value in Toledo, inexpensive real estate, access to world markets, great universities, four seasons, skilled workers, and more. Of these, I think real estate leads the pack. Ours is an undervalued asset. One only needs to look at the fact that investors from the coasts and overseas are buying up our housing to hold for investment or to improve and rent back to us. Our properties cash flow among the best cities in the US, and in deflationary economies (your home values your wages) cash is king. Investors don't get cash flows from rents on the coasts - they gain on appreciation (speculation as of late). That speculation appreciation bubble broke...hard. Meanwhile our real estate has room to appreciate in relation to other markets, because it is undervalued, our location is remarkable, and it matters not in a global marketplace where you lay your hat to call home, so long as it is nice and live-able. I believe that as the middle class gets squeezed by food and fuel coupled with stagnant wages, families outside Toledo especially mobile wage earners will come to consider locales such as ours as a good place to call home simply because of the quality of life and their housing dollar goes farther here. This is what I believe Dashing Pacific sees in Toledo and the Marina property in particular. And here the Marina development is essential toward the nice-ness dimension and attracting new moneyed residents. I think this is the globalization point wasted on most Toledoans.

To get there, we need to break away from the protectionist views espoused by councilpersons Phil Copeland (Laborers Local 500 Sec-Treasurer) and Adam Martinez (union backed politico). Mr. Copeland says he is, "Pro-Citizens of Toledo" that he makes decisions based on "what affects the citizens of Toledo." Mr. Martinez feels council has a duty to protect, "our tax base and citizens". So long as I am held out from working on cherry projects such as the Marina, Messrs. Copeland and Martinez do not speak for me, a job creator. I guarantee most union contractor Owners and managers do not even live in Toledo. And how does Mr. Martinez justify his protection of the tax base when he chases $200M in foreign direct investment out of the city? For what? Another 10 years in development Purgatory.

Note to Messrs Copeland and Martinez: Refer to the latest census report. People are fleeing the Midwest, principally Michigan and Ohio. This is clearly because we no longer have a lock on opportunities. In fact ours pale in comparison to other regions/nations. Manufacturing alone will not deliver us. Our president even says the jobs lost in the last recession will not be coming back. And, then there are structural problems with the governance and policies of our region. Adherence to prevailing wage requirements is but one of the problems. One only needs to look at nearby Detroit, a city which lost 25% of its population from 2000 to 2010, to see what is to come for Toledo so long as we cling to these old policies which are manufacturing centric and dependent upon a unionized political base. In the words of Upton Sinclair, "It is difficult for a man to understand something when his salary [power base] depends on his not understanding it!" On the flip side I also understand why Messrs Copeland and Martinez must fight zealously for prevailing wages on the Marina property and on any other project of import in Toledo. An undisclosed source tells me that Toledo is one major project going non-union away from becoming a right-to-work town. That as soon as one major property owner goes non-union so goes the hospitals and others.

Now look back at the Marina property and consider how similar it is to large swathes of Detroit. So long as the Marina remains fallow, the adjacent Front Street/Waite/East Toledo area will continue its decay. Here is where prevailing wages are hindering our recovery. And, I am reminded how Socialism destroys incentive. In Toledo we are still promoting it through Unionism, taking wealth from our collective tax revenues and redistributing it through prevailing wages (or lack thereof) in a way which makes us all more equally poor and miserable.

Now that I have said this my piece, Score: Aggregate Demand 1, Free Markets 10.


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