What are Prevailing Wages?

Jim B.
Jim B.
Businessman with a briefcase
Businessman with a briefcase

Prevailing wages are the wages paid to a majority of people who are involved in a specific labor in a specific geographic area. In the United States, an act of Congress known as the Davis-Bacon Act stipulates that prevailing wages will be used to determine the wages and benefits of workers contracted by the government for public projects. Different state governments use their own specific methods of determining what those wages should be. Identifying prevailing wage rates can be controversial in that it can lead to extra spending on public projects and advantages for workers protected by unions.

In 1931, the US Congress passed the Davis-Bacon Act. Its purpose was to prevent the government from exploiting workers by establishing wages for a certain job that were lower than the normal amount paid to workers doing that job. This law also came out of perceived racial discrimination in unions, since it allowed any workers contracted by the government to receive wages comparable to union wages. Many states have since passed their own version of the Davis-Bacon act to set up some localized method of determining prevailing wages.

Although different methods are used, the prevailing wages for an area are usually determined by the wage earned by a majority of the workers in a certain field. For example, imagine that a certain state has 100 certified welders, and, of those, 65 make $35 US Dollars (USD) an hour. In that case, the prevailing wage rate for a welder in that state would be $35 USD an hour, and that would be the rate paid for any welder hired by the state for a public project. This is also a method that can be used to determine benefits paid to such workers.

Such a method means that the prevailing wages don't always reflect the average amount of wages being paid to a certain group of workers. Using the example above, imagine that the $35 USD per hour rate is actually the highest rate paid to welders in that state. That means that the other welders in the state not making that rate are all being paid less. In this case, the average amount made by welders in the state would be lower than the rate determined as the prevailing wage rate.

For that reason, many critics of the prevailing wage laws complain that the practice leads to wasteful spending on public projects, which drives costs for those projects up. That can lead to budget shortfalls, higher taxes, and less public projects being undertaken. In addition, some see the prevailing wage laws as a way of catering to unions, whose workers usually command the highest rates and, therefore, could have a competitive advantage in getting these public contracts over companies with non-unionized workers making less.

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