The Biden Administration Is Ignoring How Its Policies Will Worsen Inflation. Again.

March 23, 2022   |   Tags: ,

Despite inflation running at a 40-year high, the Biden administration is pushing ahead with plans to hike wages for federal contractors—effectively undoing a Reagan-era policy that was implemented to help curb inflation.

In a notice published on March 18, the Department of Labor announced that it would begin the process of updating its interpretation of the Davis-Bacon Act, the 1931 federal law requiring that so-called "prevailing wages" be paid to government contractors. The law essentially sets a price floor by forbidding would-be contractors from competing for government contracts by undercutting wages, and the unsurprising result is that artificially higher wages are typically paid. Labor unions, in particular, are big fans of Davis-Bacon because it helps limit competition from non-union shops for public works projects—and has historically been used to disadvantage black and minority workers.

The Labor Department says this will be the first significant rewrite of Davis-Bacon regulations in 40 years. The change also comes at a time when the federal government is preparing to dole out more than $500 billion in new funding for public works projects after last year's passage of Biden's bipartisan infrastructure package.

But the primary change proposed by the Labor Department would both worsen inflation and result in fewer infrastructure projects being funded, according to Dan Bosch, director of regulatory policy for the American Action Forum, a free market think tank.

Here's why: Back in 1982, the Department of Labor amended the Davis-Bacon regulations to remove the so-called "30 percent rule" that said the prevailing wage for any particular area would be based on the highest wages in that area, as long as they were paid to at least 30 percent of workers.

The repeal of the 30 percent rule was a partial response to a 1979 General Accounting Office (now the Government Accountability Office, or GAO) report that called for the full repeal of the Davis-Bacon Act due to how it warped government contracting costs. "We are recommending that the Congress repeal the Davis-Bacon Act because…the Department of Labor has yet to develop an effective program to issue and maintain accurate wage determinations, and it may be impractical to ever do so, and the act is inflationary and results in unnecessary construction and administrative costs of several hundred million dollars annually," the report concluded.

Since then, the prevailing wage has been based on a weighted average of all wages in a given area. Partially reinstating the 30 percent rule, as the Department of Labor is now proposing to do, will be costly. In its proposal, the department expects to spend $35 million implementing the change—a total that does not include the added costs likely to be created by artificially inflating the wages paid to government contractors. More than 94,000 contractors earning hourly rates from government contracts would be affected by the changes, the department estimates, with the average increase being $3.65 per hour.

"The revisions seem ill-timed," writes Bosch, "given the current high levels of inflation and a recently enacted infrastructure spending program. The increased labor costs that would result will contribute to higher inflation and reduce the number of infrastructure projects that can be pursued."

The department is dismissing those concerns. The 1982 rule changes that eliminated the 30 percent rule, it claims, "were based in part on a criticism of the [Davis-Bacon] Act itself," rather than on worries about inflation. "Even if concerns about an inflationary effect on government contract costs or speculative effects on the national macroeconomy were used to justify eliminating the 30-percent rule, the department does not believe such reasoning now provides either a factual or legal basis to maintain the current majority rule."

Of course, this wouldn't be the first time the Biden administration ignored warnings about possible inflation in order to accomplish political objectives. Labor unions may very well get their bigger payday—the rest of us will keep paying more and getting less.

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