Prevailing Wages: or Bad?

However, there are many arguments that go against prevailing wage laws and many economists have contemplated about the uselessness of such laws. As already discussed, the court ruling in 1994 allowed the economists to collect some empirical evidence against prevailing wages, yet there is also some very compelling theoretical evidence against these laws. Many economists feel that prevailing wage laws are obsolete, discriminatory ineffective, inefficient, and very expensive to taxpayers. Many states have thus decided to repeal prevailing wages laws.

There are four theoretical argument against prevailing wages laws: 1. One argument is that these laws force the employers to pay the workers much more than they anticipate and thus should be paid. The universal law of demand states that the quantity demanded of labor would be inversely proportional to the price. This means that the employers would want to hire more workers if the cost of hiring them is low. Similarly, the law of supply states that if the wages are high, there will be a higher labor supply and vice verse.

If the prevailing wages laws is in effect, it removes the market of labor’s ability to determine an equilibrium wage rate as these laws forces the wage rates to go up where the labor supplied is much more (in excess) than the labor demanded. This means that prevailing wage rates tend to produce unemployment, thereby reducing the employment opportunities for the workers in the affected fields. 2. Employers that tend to show discriminatory behavior towards their employees on account of their sex, race, age, etc, the prevailing wages laws makes it easier for them to get away with it.

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It also makes it less punishable by law and makes it financially easier for the employers. This was referred to by one congressman as a problem of cheap colored labor, which was both anti-competitive and racist in origin (Vedder & Gallaway 1995). “Consider a state without a prevailing wage statute, where Contractor A wants to hire a plumber. He offers the generally agreed-upon, market hourly wage of $10 per hour and receives one job applicant, an African-American. Even if Contractor A possesses some racial prejudice, he almost certainly will hire the black applicant because he needs a plumber.

To get more applicants in the hopes of attracting a preferred white worker, he would have to offer to pay more, thus lowering his profits. Now suppose a prevailing wage law sets plumber wages at an abovemarket rate of, say, $15 per hour. Contractor A gets three applicants, two white and one black. He can now hire a white worker without a financial penalty. In other words, prevailing wage laws remove the financial disincentive for employers to engage in racial discrimination since all workers must be paid according to the same wage rate” (Vedder 1997).

3. Sine prevailing wages are higher than normal wages that are normally agreed upon, they should lead to either the contracted goods being places at a higher rate, or to reduce the quantity of the goods/services that is being provided. “For example, suppose it costs $5 million to build on average one mile of highway when contractors pay voluntary market wages, but $5. 5 million when they pay government-mandated prevailing wages. Suppose further that a state highway department has a budget of $300 million for new highways.

Without prevailing wages, 60 miles of road can be built; but with such wages, only 54 miles can be constructed” (Vedder 1997). Thus prevailing wage laws tend to reduce real infrastructure investments. 4. There are some very obvious administrative issues that come up when the wage rates for the same job appear in an irregular manner. The complexity of keeping up with these wage rates considerable raises the administrative costs and allow for the possibilities of fraud and abuse.

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