The nation’s economy is in trouble. How bad it is and how long it will last is open to speculation. Economists’ prognostications are treated with a good bit of skepticism—and for good reason. Our track record would shame a weather forecaster in a third-tier media market. In our defense, the economy rises and falls for a combination of real and perceived reasons. And perception is often more powerful than reality. At the moment we confront a real problem of global liquidity that has been revealed in an ongoing series of disclosures, each more surprising than the last, often in obscure markets that are unexpectedly significant. Each new revelation erodes the sense that we really know what’s going on in the markets or, more to the point, what it all means or when this steady stream of bad news will end. It is this uncertainty and ignorance that feeds negative perceptions about the future, perceptions that may be right or wrong but influence behavior nonetheless.
Against this backdrop of uncertainty, the NYS legislature is considering legislation that will reduce the state’s ability to compete in the global economy. New York already has the second highest cost of doing business in the nation, ranks 35th in the state competitiveness index, and ranks 48th in the Tax Foundation’s Tax Climate Index.Currently, construction projects receiving federal or state funding have to pay construction workers a rate called the “prevailing wage.” The prevailing wage usually is close to the regional union wage and is higher than the market wage. The proposed legislation would extend prevailing wage requirements, which are now limited to only public works projects, to all new construction projects for which industrial development agencies issue revenue bonds or provide tax abatements. Many major development projects in the private sector are funded this way.
Like most mandates, this one has a laudable purpose, that of increasing worker wages. If you adopt a simplistic view of the world, the law would shift income from “capitalists”—the developers—to “workers.” The law just changes who gets the money. Minimum wage or living wage laws are similar. And there are circumstances in which this is exactly what happens—the mandate simply moves money from the employer’s pocket to the worker’s.
The world is a more complicated place, however. If enough developers compete for a project, bids will be driven by cost and the bid price will be higher if developers are required to pay prevailing wage. The higher cost of labor will be passed on to whoever is ultimately paying for the project. If the project can be built in another state for less than it costs in New York, the mandate will erode New York’s competitive position.
CGR recently studied the effect of the prevailing wage requirement on competitiveness (working on behalf of the state’s industrial development agencies). We compared the cost of constructing a project in the seven largest metro areas in New York—Albany, Buffalo, Long Island, New York City, Poughkeepsie, Rochester, and Syracuse—with the costs of seven “competing” regions outside the state—Tampa, Indianapolis, Raleigh, Cleveland, Providence, Scranton, and Austin. We found that the effects are larger for downstate than upstate metro areas, but in both cases, the cost of construction increases dramatically. For example, a project that might cost $10.2 million in Rochester now would cost $12.5 million to build with prevailing wage. Things are much worse downstate. A project now costing $10.7 million with market wages in Poughkeepsie would cost $16.4 with prevailing wages – an increase of 53%.
A company considering whether to locate in Providence or Rochester will prefer Rochester under market wages—our “prototype” project would cost $10.2 million in Rochester versus $10.6 million in Providence. Yet Rochester is 18% more expensive under prevailing wage. This scenario is similar for each of the seven metro areas in NYS.
The competitive climate is much worse if we compare any NY metro area to the three southern metros in our study. Even with market wages, the project cost in our NY metros is from 14% to 40% higher than the equivalent project could cost in Austin, Tampa, or Raleigh. Require the project to pay the prevailing wages and the NY project costs are 36% to 107% higher. Although we can offer these companies the advantages of snow in the winter and moderate temperatures in the summer, these cost differences may overwhelm the appeal of skiing and long underwear.
Unions have complained that our study did not take into account productivity differences between union and nonunion labor. And some responsible studies make the case that workers earning union scale are more experienced and more productive. It would, however, take a significant difference in productivity to overcome the kind of cost difference we measured between Rochester and Austin. Nor does current law prevent contractors from hiring union labor—if the productivity difference is large enough, contractors will bid the work accordingly. Must we force them to act in their own self interest?
The bottom line? Prevailing wage policy would inflate already-high construction costs and weaken our state’s ability to compete for major construction projects. New York’s competitive position is already tenuous. As the national economy weakens, competition for new development will only become more significant. The Legislature’s decision matters.
If you want to know all the details, take a look at the full report on our website, www.cgr.org.