This past week, Governor Brown signed 15 housing bills into law. 5 of them include a prevailing wage component that goes into effect January 1, 2018.
California has a definite housing problem. Right now there is a need for 180,000 homes and only 88,000 homes are being built in an average year.
Existing law already requires that prevailing wage be paid to workers on State financed project (ever wonder why it costs so much for the State to do anything?). This new legislation reaches over into the private sector to tell them how much they must pay everyone and extends the influence of Unions into non-union work-places.
Prevailing wages have been around since the 1930’s and were used to kick-start the economy with projects such as the Hoover Dam. As an example, if you are a bricklayer in Sacramento, the prevailing wage is $70 per hour. In San Francisco, that may be $90. And, of course, there is the story of the person who was paid $46 per hour to vacuum at a construction site because that is the prevailing wage for clean-up work. The Janitorial description would have been much less at around $12 per hour.
An analysis of the cost of prevailing wage on the average home in California reveals the following:
- Almost all employees will be paid a much higher wage. The range is an increase of 39% for electricians to 116% for construction labor.
- The overall increase in labor cost for residential construction would be 89%
- Labor accounts for about 41% of the cost of an average home, so this would mean an increase in the total construction cost of 37%
- Put into monetary terms, if the average cost of home construction is $88 per square foot, the 37% increase would add another $32 per square foot for a total cost increase on the average home of $84,000!
Proponents of the bills say the cost will be mitigated by the fact you are hiring professionals who will work faster, more efficiently, with less errors in the construction process. However, they have no significant evidence to back up this assumption. Rather, I refer you to the Bay Bridge retrofit project in San Francisco built by Union workers and under prevailing wages that is crumbling and needs millions of dollars to be fixed. I also refer you to our present high-speed rail project with it’s original cost going from $9 billion to $65 billion (or more) as costs continue to rise. These projects do not support the idea that if you pay a person more, they will save you money.
So far, these bills only apply to projects that take advantage of certain State fast-track waivers for environmental reviews and permitting process. However, based on past history, the next round of legislation may be to impose prevailing wage on all “trades” work. And, it may reach over to regular private work that is not regulated by State laws. It could move next to any work permitted by the county, city or municipality. The cement slab you want for a patio may double in cost.
This is a long, slippery slope that has no factual standing. At the end of the day, there may be no increase in building homes because the cost savings of fast-tracked government regulations may not off-set the increase labor costs. In fact, it may not even off-set the increased worker’s compensation insurance costs associated with the significant increase in wages. If labor costs increase 87%, then worker’s comp costs will almost double for the contractors. Also, there is an a large increase in payroll taxes associated with the increased payroll. The State likes that.
So, what we have here is another example of legislation written to make the Politicians look like they are doing something, and appeasing their select groups (unions). But, there is very little evidence it will actually improve the housing problem in California and even less chance that those homes will reduce the cost of housing. We will have to wait and see what comes next.