Nevada’s Prevailing Wage Law Needs Review & Reform

Posted on by & filed under Nevada by the Numbers Blog.

ICYMI, Nevada’s prevailing wage law recently acquired a small chink in its armor. SB 119, a bill that excludes construction projects for school districts, charter schools, and the Nevada System of Higher Education from prevailing wage requirements, was signed into law in February.

Two other measures concerning prevailing wage are still pending in the Legislature. SB 108 initially proposed raising the threshold for the application of prevailing wage requirements to public works projects from $100,000 to $1,000,000. The Senate Government Affairs Committee amended the bill to set the threshold or “trigger” at $500,000 and passed it out of committee on April 3. It awaits a vote on the Floor.

The second bill (AB 172) seeks to require contractors on public works projects to use the E-Verify system to confirm worker employment eligibility. The measure originally proposed to increase the prevailing wage threshold to $500,000, but the bill was later amended to set it at $350,000. The bill also seeks to require the Office of the Labor Commissioner to adjust the threshold amount every five years based on inflation increases. The bill passed the Assembly on April 20, was read in the Senate for the first time on April 21, and now sits in the Senate Government Affairs committee.

 Pros and cons

Lawmakers have made numerous attempts to change Nevada’s prevailing wage law over the past decade or so. One of the strongest arguments for reform is that the current system artificially inflates construction labor costs, because it is based on artificial, above-market wages — and that because it applies to public works projects, that additional cost is paid for by taxpayers.

Arguments against changing the law include concerns that lower pay for construction workers will lead to a reduction in quality of life for middle class families in Nevada and a subsequent slowing of the economy, and that job site safety and construction quality will suffer.

Methodology

An important issue to consider when evaluating prevailing wage law is the method by which wages are set. Currently, the Office of the Labor Commissioner establishes prevailing wages for each county based on an annual survey of contractors who performed work. On its face this seems like a sound method, but in reality it is flawed because the survey response rate, especially from private sector firms, is quite low. This leads to the equivalent of a “sampling error.”

A review of the number and type of responses shows a low response rate overall; in one recent year the reply rate was less than five percent. Additionally, of those who respond, the state sees relatively high survey response rates from union firms and extremely low response rates from non-union firms. As such, prevailing wage in Nevada is more a reflection of standard union wages and not of actual, average market wages.

Consider the table below, which shows the current prevailing hourly wage rates for eight job classifications in Clark County and Washoe County:

Screen Shot 2015-04-30 at 4.32.24 PMThe disparity between prevailing wages in certain job classifications in Washoe and Clark County is indisputable evidence that the state’s wage-setting methods are flawed. How can it be that a Glazier Journeyman’s work is worth $19.97 per hour in Reno but worth $62.72 in Las Vegas? Or that a Flag Person in Reno earns $29.24 per hour while a Flag Person in Las Vegas earns $46.29? The two economies are not different enough to justify such significant rate differences. (Other similar disparities exist in the schedules for the different counties, which can be found on the Labor Commissioner’s website.)

Studies

When comparing county prevailing wage rates to actual market wages, it can be helpful to review the Occupational Employment Survey (OES) conducted by the Nevada Department of Employment and Training (DETR). The survey goes out to 1,700 Nevada employers on a semi-annual basis.

Several such studies have been done in recent years. The findings are that prevailing wage laws do indeed result in a “pay premium” for the majority of job classifications. The most notable analysis, completed by the Beacon Hill Institute at Boston’s Suffolk University, concluded that federal prevailing wage requirements result, on average, in a 22 percent wage premium.

In 2011, RCG compared OES data to the prevailing wage schedule for FY 2012 for Clark County, Washoe County, and Carson City. The results showed that in the vast majority of classifications, prevailing wage rates were well above the OES rates. Of the 32 job classifications in Clark County, 29 – or 90.6 percent – enjoyed rates above the OES mean wage.

Across all job classifications, the average wage premium was found to be 43.7 percent, or $13.40 per hour. For Washoe County, when the data was compared across all 29 OES classifications, the average wage premium was 23 percent, or $6.74 per hour. For Carson City, OES data across 12 job classifications showed an average wage premium of 43.6 percent, or $10.89 per hour.

(Note: In order to compensate for the differences in the two survey methods, RCG’s evaluation weighted the OES numbers upward in order to compensate for the average value of employer-provided benefits at the various levels, which are an important part of employee compensation calculations.)

School construction case study

RCG also compiled labor data for the construction of a Clark County School District facility in order to demonstrate a real-world prevailing wage example. The Variety Special Education School was built between January 2011 and January 2013. RCG obtained total labor usage data for each classification of worker during the period of construction and calculated the costs of compensation to workers at prevailing wage rates vs. OES mean wage rates.

RCG’s calculations showed that labor costs for the project amounted to $4.31 million under existing prevailing wage requirements, and that those same expenses would have been $2.52 million had all workers been compensated the OES mean wage in Clark County. Prevailing wage requirements added no less than a 31.3 percent labor cost “premium” to the project.

Mitigating considerations

Cost of labor is only one of many components of the cost of construction. A contractor, depending on how it operates, could compensate for the cost “premium” of prevailing wage through lowering its margin on the resale of building materials as well as its own overall profit margin, thus bringing the total cost of the job down to fair-market value. Additionally, contractor use of labor-reducing, time-saving machinery reduces the amount of field time needed to finish a project, thereby yielding higher efficiency and productivity and offsetting at least some of the cost of prevailing wages.

There are also social and economic benefits of higher middle class wages including lower participation in public support programs, improved child welfare, and a more robust local economy because workers and their families have more disposable income to spend.

Conclusion

Nevada’s prevailing wage laws result in higher paid workers on public works projects, which drives up construction costs and thus costs taxpayers more than they would otherwise pay. The wage premium is higher in Clark County than in Washoe County or Carson City, but in all three cases, the wage premiums are due primarily to the flawed method for calculating prevailing wage rates. Additionally, disparities in rates between counties are not justified by disparities in the local economies and call for review.

In light of the issues with methodology, possible solutions could include:

  • Using a more robust data collection process. Ideally, the process would involve obtaining wage data from a majority of private, non-residential construction contractors and using only that data to set prevailing wage.
  • Using survey averages. Prevailing wage should be based on the average, or mean, not the mode.
  • Using OES data. The OES is federally funded; using its data would relieve the Labor Commissioner from data-collecting activities would also provide a cost savings for state taxpayers.
  • Ensuring rates reflect accurate county data across all Nevada counties.
  • Exempting particular classes of construction, including but not limited to low-income housing, prison facilities, public buildings, or highway construction.

This is one in a series of RCG Economics public policy pieces. Please do not hesitate to contact us with your questions and feedback.