California has a housing crisis. Supply has not kept pace with demand. Rents and home prices are soaring and many working families are being priced out of the market altogether.
The state Legislature is considering myriad ideas for reform. One that has generated a lot of push-back from the building industry is incorporating prevailing wage standards into more residential projects.
"Prevailing wage" refers to what's generally paid to skilled craft workers in different regions. Based on local employer surveys, it includes hourly pay, benefits and training costs for dozens of different construction occupations. It sometimes, but not always, reflects union rates. Typically required on publicly funded construction projects, prevailing wages encourage contractors to compete based on workers' skill, experience and productivity, as well as on innovative project management — not merely on who can pay their workers the least. Decades of peer-reviewed research have linked prevailing wages with higher-quality craftsmanship, more local hiring and lower poverty rates among construction workers.
Some builders and developers falsely claim that paying prevailing wages would lead to higher housing prices and make the state's affordability crisis worse. They're wrong; they want to maintain a status quo that allows them to line their pockets at the expense of workers and taxpayers.
According to my analysis of U.S. Census Bureau data, the profits of the private residential construction industry have grown 50% faster than the cost of labor or materials since 1992. During the same period, the inflation-adjusted wages of California's blue-collar construction workers have declined 25%. The median annual wage for all construction workers is just $35,000 statewide, and only $30,000 in Los Angeles County.
Medicaid reliance among construction workers is twice the national average for those in similar work categories. In California's biggest cities, 42% of households supported by blue-collar construction work qualify for housing subsidies.
For immigrant and minority construction workers, the news gets worse. They make up most of the construction workforce and they are earning only 70 cents on the dollar — on average — of their white counterparts with the same skills.
A broader mandate for prevailing wage would make a positive difference in these shameful statistics, and the consensus among researchers and economists is that it would have no significant effect on the cost of construction.
America is divided roughly in half — between states with strong prevailing wage laws and states without. A growing number of states and towns have also had the experience of going from strong prevailing wage standards to none at all, and vice versa. This has given researchers an ample supply of comparative data, both quantitative and experiential.
For example, the Republican majority leader of the Indiana House of Representatives recently acknowledged that his state "didn't save a penny" in construction costs by eliminating prevailing wages on publicly funded projects. Similarly, when the city of Carlsbad did away with its prevailing wage rules it found that savings were "hard to ascertain."
The reason is simple. The government's Economic Census shows that wages and benefits represent just 15% to 23% of total construction project costs. In other words, builders have room in their budgets to increase wages and benefits, to adopt the prevailing wage. When they do, they attract higher skilled workers, which in turn triggers improvements in productivity and efficiency on the job site, which offsets any increase in spending on wages and benefits.
In fact, a likely reason why California's housing supply hasn't been keeping pace with demand is because the industry's productivity is in decline. It takes 13% more workers today to match California's construction output of 20 years ago, according to Department of Commerce data.
It comes down to fundamentals. To boost housing supply enough to stabilize or reduce prices, we need to work smarter. To work smarter, we need to invest in skilled workers. To recruit and retain sufficient quantities of these workers, there has to be an investment in training and paychecks workers can live on and even use to rent or buy the housing they build.
In opposing prevailing wage, residential builders are asking us to retain a low-road model that relies on low pay, degraded productivity and bad workmanship. And it shifts what ought to be industry costs onto taxpayers. This is not a solution to California's housing affordability crisis. It's a big part of the problem.