Prevailing wage laws freeze less skilled workers out of labor markets, just like minimum wage laws

There is a new report out about the effects of ‘prevailing wage’ laws in Minnesota. The report makes a number of claims which I’ll address in subsequent posts. But I wanted to start by noting something I agree with the authors on.

The report says that

“peer-reviewed research indicates that, when wages rise in construction, contractors respond by utilizing more capital equipment and by hiring skilled workers in place of their less-productive counterparts”

So it does. Imagine a producer who can use either capital inputs or labor inputs to provide a good or service. If the price of one input rises relative to the other, they will cut back on using the expensive input and use the less expensive one. So, the authors argue, when prevailing wage laws artificially raise the price of labor, producers switch to capital inputs instead.

So far, so sound. I agree with the report authors 100% on this point.

But follow it through. If prevailing wage laws incentivize producers to switch from capital to labor by artificially making labor more expensive, then why wouldn’t minimum wage laws have exactly the same effect?

The fact is that they do. The cost of capital replacements for labor falls over time due to improved technology. Think of the self service machines in McDonald’s or the scanners at Target. Where were they 10 years ago? Now, add to this a legally mandated rise in the price of the worker who is competing with these machines. What do you think is going to happen to the amount of labor purchased? Do you think it is going to rise, fall, or stay that same?

All prevailing or minimum wage laws do is outlaw the hiring of workers who do not have the skills to generate output above whatever level the politicians set the wage at. And these workers tend to be younger or belong to minority groups. As Stephen Vukovits writes,

A recent study by David E. Bernstein of the Antonin Scalia Law School at George Mason University concluded that these restrictions disproportionately hurt minority contractors since African Americans and immigrants tend to be less skilled…Nearly 98 percent of African American and Hispanic construction companies are non-union, so wage rate restrictions that favor unions hit these communities the hardest.

Data from the Bureau of Labor Statistics shows that the employment-participation rate for 16- to 19-year-olds in Minnesota fell from 69.8 percent in 2000 to 52.3 percent in 2016, a decline of 17.5 percentage points. Unemployment rates for black and Hispanic workers in Minnesota continue to be above those for whites. To a large extent, these are the results of policy decisions, such as prevailing and minimum wage laws. Politicians should stop scratching their heads wondering where these problems come from, and act to solve them.

John Phelan is an economist at the Center of the American Experiment.