An Evaluation of the Fiscal Note-Revised for the

Component of the Capital Bill-Prevailing Wages.

Kevin Duncan, Ph. D.
Professor of Economics,
Colorado State University-Pueblo
March 26, 2015
In preparing the fiscal note, the Vermont Department of Labor and the Department of Buildings
and General Services utilized an intuitive method in estimating additional construction costs if
Vermont were to switch from current prevailing wages (based on the Occupational Employment
Statistics) to federal Davis-Bacon prevailing wage and benefit rates. The cost estimate is based
on the share of projects subject to prevailing wages (40% to 60%), estimated labor costs as a
percent of total construction costs (32%), and the estimated difference between prevailing wage
rates under the current policy and Davis-Bacon rates (20% to 30%). Based on this information,
the estimated cost increase associated with the policy change ranges from 6.4% to 9.6%. While
the desire to obtain a cost estimate of the policy change is understandable, the intuitive method
utilized in the fiscal note is seriously flawed and the estimated cost impact should be viewed with
extreme caution. The problems associated with the intuitive method are described below.
Major problems with the cost estimate:
1. Research indicates that when wage rates increase in the construction industry, several other
factors change that mitigate the effect of higher wages on total construction costs. For example,
when wages rise, there is a substantial increase in the use of more skilled and productive
construction workers. Similarly, more equipment, and less labor is employed as wages rise.
Material and fuel costs are lower when wages are higher and more productive workers are
employed.1 It is not possible to accurately measure the effect of a wage increase on total
construction costs unless these mitigating factors are taken into account.2 The fatal flaw of the
intuitive method used in the fiscal note is that these factors are ignored. A method that takes into
account an increase in wage rates, but ignores other mitigating cost and productivity changes,
provides an unrealistic and completely unreliable estimate of the cost of the policy change.
2. The fiscal note cites prevailing wage cost estimates from other states (Maryland and
Kentucky) that employ the same, fatally flawed intuitive method. The fiscal note also references
a study examining the savings associated with the repeal of prevailing wage requirements for
school construction in Ohio. This study uses a method of statistical estimation that indicates a
cost reduction of 10.7% with repeal. However, the statistical estimate is very poor. The measure
1

See, Kevin Duncan, Survey of the Research on Changes in Prevailing Wage Rates
and Total Construction Costs: Implications for the Proposed Capital Bill, February 16, 2015.
2
The Fiscal Note acknowledges the difficulty with respect to one of these factors, labor productivity. See page 2,
note 3.

of the estimates goodness of fit ranges between 6% and 1%. This means that from 94% to
99% of the variation in the costs of school construction projects included in the study, is not
explained by the estimate. This is an exceptionally poor fit and indicates that the study does
not take into account sufficient information regarding other factors that affect school
construction costs.
3. The fiscal note does not reference any academic research on the cost effect of prevailing
wages. The preponderance of this research indicates that there is no statistically significant
effect on construction costs when prevailing wage rates change, are introduced, or repealed.3
One of the options for further analysis listed in the fiscal note is to commission of meta-analysis
of the substantial research on the impact of prevailing wage laws.4 There is no need to
commission such a study as these types of reports have already been performed by scholars who
conduct research in this area. Again, the preponderance of this research indicates that there is no
statistically significant cost effect of prevailing wage laws.5
Minor problems with the cost estimate:
1. The estimate reported in the fiscal note is based on labor costs equaling 32% of total
construction costs. This estimate is obtained from the REMI economic impact software. This
figure is at odds with data from the Economic Census of Construction. 6 The Census information
is based on a survey of contractors and gathers data on the value of construction, labor costs for
administrative and construction workers, fringe benefits, etc. Data from this source indicates that
labor costs are approximately 25% of the total costs for the types of structures covered by
Vermonts prevailing wage law.7 Using a larger labor costs percentage results in a larger overall
cost estimate.
2. The estimate reported in the fiscal note is based on a 20% to 30% wage differential between
Davis-Bacon and Vermont prevailing wage rates. There is insufficient explanation regarding the
selection of this range. An examination of Davis-Bacon and Vermont prevailing wage rates
3

Ibid., pp. 6-12.

See Fiscal Note, p. 2.
5
These reports are non-technical and intended for general audiences. See Peter Philips and Cihan Bilginsoy, The
Impact of Prevailing Wages on the Economy and Communities of Connecticut, 2010. Accessed at:
http://www.housedems.ct.gov/MORE/Mandates/pubs/CT_2010_PW_Philips_Bilginsoy.pdf. An up-to-date and
comprehensive review of the research can be found in Section 7, pages 64 to 72 in Kevin Duncan and Jeff
Waddoups, Does the Release of Davis-Bacon Certified Payrolls Cause Competitive Harm to Contractors? August
2014. Accessed at:
http://www.denvergov.org/Portals/741/documents/PW_General/Torres%20Report%20on%20Certified%20Payrolls%20Duncan%20and%20Waddoups%20December%202014%20Final.pdf.
6
See the U.S. Census Bureau, Economic Census of Construction, Construction: Geographic Area Series: Detailed
Statistics for Establishments, accessed at:
http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23A1&prodType
=table.
7
Ibid., pp. 3-6.
4

indicates that in some cases, wage rates on state=funded projects exceed comparable DavisBacon wages. Also, while the federal policy allows for benefits, fringes do not prevail for every
occupation and county in the state.
An examination of state and federal prevailing wage rates for the occupations involved in
building construction in Chittenden County illustrates the problem of assuming a 2-% to 30%
Davis-Bacon wage differential. These data are reported in Table 1. The data are for those
occupational classifications that overlap for federal and state prevailing wage categories. Federal
projects report hourly wage and benefit rates. The OES data report only hourly wages.
Consequently, it is only possible to compare wage rates.
Table 1. Federal and State Prevailing Wage Rates by Occupation for Building Construction in
Chittenden County, Vermont.
Occupation
Davis-Bacon
Vermont
Percent difference between
Prevailing Wage
Prevailing Wage Davis-Bacon and Vermont Wage
Electricianu
$22.14
$20.01
10.6%
u
Plumber
$27.40
$22.31
22.8%
Sprinklerfitter
$19.43
$22.31
12.9%
Sheet Metal Workeru
$23.25
$22.87
1.6%
Roofer
$18.98
$15.52
22.3%
Painter
$16.82
$17.92
6.1%
Operating Engineer $19.00 & $17.00
$19.94
4.7% & 14.7%
Brick Layer
$25.89
$25.67
1%

Carpenter
$17.15 & $20.28
$21.39
19.8% &5.2%
Laborer
$13.11
$14.61
10.3%
Average

1.3%
Source: Wage Determinations Online.gov (accessed at: http://www.wdol.gov/) and 2014
Vermont State Construction Prevailing Wage (accessed at:
http://www.vtlmi.info/stateconstrprevailwage.pdf). u Union rate prevails for the Davis-Bacon
rate for this occupation. Sprinkler fitters have a separate classification in Davis-Bacon, but are
combined with plumbers, pipefitters and steamfitters in the OES. Davis-Bacon rates report two
classifications for these occupations.
The data reported in Table 1indicate positive Davis-Bacon wage differentials when union rates
prevail. Data for electricians, plumbers, and sheet metal workers indicate that hourly earnings
are from 22.8% to 1.6% higher under projects covered by Davis-Bacon. However, union rates
do not prevail for all occupations involved in federal projects. There is a substantial range in the
Davis-Bacon wage differential for the occupations where the average rate prevails on federal
projects. The gap is as high as 22.3% for roofers and as low as 19.8% for carpenters. The
average differential for all occupations is 1.3% indicating that, on average, Davis-Bacon hourly
wage rates are 1.3% lower than the OES rates used to determine prevailing wage rates for statefunded construction in Chittenden County.

These data are from one county. But, the average for this county is far from the 20% to 30%
differential used in the fiscal note. It may be that the 20% to 30% differential is based on
including the benefit differential between Davis-Bacon rates paid in Vermont and the benefits
that are, in practice, added to the OES-based prevailing wages paid on state-funded projects. It is
worth noting that the prevailing hourly benefit rate for the one of the operating engineer
classifications and for the painting category, reported in Table 1, is $0.00.
However, if differences in benefits increase the total hourly compensation differential between
federal and state projects to 20% to 30%, as reported in the fiscal note, the State of Vermont has
a very serious problem with the lack of benefits paid on state-funded projects.
Addressing the minor problems associated with the intuitive method used in the fiscal note will
not overcome the fatal flaw associated with this method.