Why “Prevailing Wage” Theory is Not the Answer

The recent ruling in finding NYC’s prevailing wage unconstitutional was the correct decision. Bloomberg understands the fundamental economic premise regarding paying a wage what the market dictates the worker is worth. Those that support the prevailing wage policies do not. It is both unfortunate and dangerous, because implementing a prevailing wage has two effects: 1) it devastates the very people its proponents think they are helping and 2) it erodes NYC’s economy by creating more barriers for businesses.

When a government takes taxpayer money, it takes it as a fiduciary; that is, it implies a relationship — legal, ethical, and economical — between “trustee” (government) and beneficiary (taxpayer).Therefore, the government has a moral, if not legal, obligation not to spend more money or pay anything more than the market demands.

The very act of paying $10 for something that costs $8, under the notion of “prevailing wage”, would put any other private businessman in trouble. Prevailing wage theory is not the government acting out of the kindness of heart, like its proponents would have you think. It raises the cost of goods to all constituents, increases the cost of living, and slows down the local economy.

The judge, although he ruled correctly, did so reluctantly — seemingly only under the technicality that the “law contravened state law”. He described how, “this court believes that the prevailing wage law could benefit the people of New York and does not see wisdom in the mayor’s zeal for the possibility of welcoming to New York City a business that would pay its building service employees less than the prevailing wage”. Bloomberg, however, hit the nail on the head when he countered that “legislation like this makes it harder for companies to invest in New York City.”

Here’s what the prevailing wage campaigners fail to discuss or flat out don’t understand from fundamental economics. The extra money being paid in a prevailing wage only benefits people that you can see. You do not see the hidden costs that add up to the employer, which create a net loss to the economy (deadhead costs). When you pay $10 for $8 worth of labor, it is identical to imposing a tax from an accounting point-of-view. What you see is the extra $2 going into the employee’s pocket. What you don’t see is the effects of the price increase on the business owner or the economy — how he absorbs the cost, offsets the cost, changes or slows production, cuts back hours or product, and so forth. That is the unspoken deadhead cost, a loss which has a ripple effect on the rest of the economy.

Prevailing wage is a scourge that must be stopped in its entirety, or else it will continue to grow. It doesn’t matter that one judge in open court halted the process. The people pushing for its policy must come to understand the basic economic premise — that when you artificially raise the price of something, you get less of it. Ergo, if you artificially raise the price of wages, you get less of that too — because many companies cannot afford the additional costs (or they would have to pass on the higher costs, but at the higher price there would be fewer buyers).

Artificial wage prices impede a business’ ability to grow and invest. There are many arguments against a “prevailing wage”, chief among them the burden on businesses — which are already struggling. The failure to understand the true effect of artificial wage control on the economy-at-large is frustrating. Such faulty logic is representative of the current trend to focus on feel-good rules rather than economic well-being for all. At least Mayor Bloomberg, who has been a successful businessman, (despite all his other faults) was willing to fight against measures like a “prevailing wage” that would keep NYC’s economy both depressed and sluggish.


  1. Rafael says

    It is worst than a “scourge” and there are no words for it! It provides gratification to employees artificially and fills their pockets for trivial work that requires minor qualifications (GED) yet pays at a rate that even people with a Master’s Degree can not make. It sends a message to the Public School System…”you don’t have to study and earn a degree you just weasel your way through passing with low grades and getting into a prevailing wage job were your pay increases overtime (guaranteed). The City loves you and gives you lots and lots of money”.

    How can politicians say they want to improve education and yet send another message at the same time? “Out of the goodness of our hearts, you will receive prevailing wage and most every year in July it will increase…don’t worry your employer (the poor SOB) will pay for it. He’s the “bad guy”. You are the “good guy” and we are “your guardian angel.” GOOD LUCK EDUCATING OUR KIDS!!!! It will NEVER happen as long as there is an easy way out. Prevailing Wage destroys and is ridiculous in a Capitalist Based Economy. The theory is along the same line as COMMUNISM…yet we fought a Cold War against Communism and scold Communist Countries. What’s the difference when the principle between Prevailing Wages and Communism is the same? The government sets the wage scale…that’s Communistic? Against our Constitution. Minimum wage is fair to protect employees from abuse by employers. Prevailing Wage is wrong!

    The effect of prevailing wage is enough to make people paying it to throw up. There are many companies which refuse to perform prevailing wage work…the numbers are increasing. Quality in workmanship of prevailing wage jobs is decreasing. Time to completion in prevailing wage jobs is also extending. The Net effect is great reduction is productivity of the City. The City ends up loosing so much and if the Leprosy of Prevailing Wage is not halted it will continue to eat away at the fabric of this great City.

    Prevailing Wage is devastating. It deprives education and improvement through competitiveness. Why kill yourself? You are getting prevailing wage and the law protects you. “Go dust and clean and get prevailing wage to do it”. Why care about your performance? You are getting prevailing wage. Why study and educate yourself? You are getting prevailing wage. Why work hard? You are getting prevailing wage. Why pursue higher degree? You are getting prevailing wage.

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  5. says

    If the government chactes someone paying less than minimum wage they should do far worse than jsut asking them to top up the wages (and ignorance is a poor excuse) – that encourages poeple to have them on particularly since hte catch rate as far as I can see is damn close to 0%.I note that the market rate for a chef at a food court isabout 4-5 dollars an hour. And legal firms have a hard time competing in that context.If we have a minimum wage it should be enforced with heavy financial penalties otherwise the market is unfair.As for hte minimum wage at a low level there is a very clear justification.the marginal cost of labour just like the marginal cost of computer software is close to zero – the market will settle down to paying close to zero for all non monopoly labour.You wnat to prop up wages so at least they are above the marginal cost plust the investment cost (eg education and so forth which in software would equate to software development and setting up of infrastructure capital etc)At one level these effects dominate and everyone benefits from not allowing capitalism ot run wild (just think in a perfect free market we would remove your monopoly on being able to do wahat you do in order to force your wages down to marginal cost jsut like everyone else.)At another level probably when minimum wages pass a certain level considering all sorts of other things like how hot the economy is – then the effects you are talking about become more important infact those forced from wages to unemployment may loose more than those who remain employed gain.the smart position is to realise it is a matter of optimization not of mindlessly following an ideology.


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