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Remodeling Kentucky’s prevailing-wage policy

Streamlined rate-determination process, fair survey system could close wage gaps, encourage more employer participation and lower cost of public construction

By Paul S. Kersey

Executive Summary

Kentucky’s prevailing-wage law is a good deal for construction workers on state and local government projects. But it’s a bad deal for taxpayers.

The statute defines the prevailing wage as the hourly amount, including base pay and fringe benefits, received by a majority of workers in the area where public projects, including schools, are being built. However, a lack of sufficient data that accurately reflects local communities’ wages, along with methods used by the Kentucky Labor Cabinet to determine prevailing-wage rates, result in artificially high pay scales that add millions of dollars to public-construction costs.

The Legislative Research Commission (LRC) estimates the base wages of employees constructing public buildings are typically 24 percent more than the wages paid to workers with similar jobs on nonprevailing-wage projects. According to the LRC, these inflated wages added more than 7 percent – or nearly $137 million – to the cost of government construction across the commonwealth in 2002.

While the state Labor Cabinet uses the federal prevailing-wage designations in 39 Kentucky counties, it divides the remaining 81 counties into 20 localities that follow the borders of state Senate districts.

This division of counties has little rhyme or reason. For example, the state’s Labor Cabinet uses the federal government’s wage determinations in Jefferson County, where the medium-sized city of Louisville and a fairly large university are located. However, the state sets its own prevailing-wage rates in Lexington, another medium-sized city that hosts a major university.

In addition to the haphazard approach of using federal determinations in some localities and state decisions in others, the lack of wage-survey data – especially from nonunion contractors – also contributes to the increased cost of public-construction projects. Concerned about sharing sensitive information with their competitors, many contractors – especially nonunion ones – are not prone to publicly share wage data.

A 2001 survey by the LRC found that 66 percent of nonunion contractors had sent no wage data – information that could be used to determine more accurate prevailing wages – to the Labor Cabinet for more than two years. On the other hand, union workers, who comprise only 22 percent of Kentucky’s nonresidential construction workforce, account for 81 percent of wage data submitted at hearings held to establish prevailing-wage rates.

Both state and federal processes for deciding prevailing wages tend to pass over nonunion contractors and give excessive weight to data offered by unionized construction firms with higher wages. This approach results in an inaccurate reflection of the real construction labor market by exaggerating the number of unionized workers which, in turn, tends to push wages upward.

In Lexington, for example, the prevailing wage established by the state is higher in nine of 10 cases than the Bureau of Labor Statistics’ (BLS) median wage for the same kind of work. In the case of sheet metal workers, the prevailing wage exceeds the median wage by as much as 71.5 percent and is, on average, 28.1 percent higher than the median wage determined by the BLS.

Much of the additional labor costs of public projects could be removed by changing the state’s prevailing-wage rules so that wage rates reflect real conditions of the marketplace instead of the inflated pay scales found in Kentucky’s union shops. To accomplish this, the state should:

• Do a thorough survey of employers. The General Assembly should require the Labor Cabinet to collect wage information from all contractors, keep the responses confidential to encourage participation by nonunion firms and insist that prevailing-wage rates reflect market conditions.

• Refrain from using prevailing wages paid on past public-construction contracts to determine future rates. Wages paid on prior public-building projects do not necessarily reflect current market conditions, and therefore should not be used to determine prevailing wages. To continue using them will skew accurate wage determinations in the future and drive up taxpayers’ investments in public projects.

• Use fewer localities that comprise larger areas with more data. Making prevailing-wage judgments in so many different areas results in a shortage of data to determine accurate rates. The more data that can be gathered from contractors – union and nonunion – the greater the chance that prevailing-wage rate determinations will more closely reflect wages paid for similar work on nonprevailing-wage projects.
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The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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