There's a simple step the government can take to raise pay and solve labor shortages — it's called prevailing wage law

There's a simple step the government can take to raise pay and solve labor shortages — it's called prevailing wage law
Hyoung Chang/MediaNews Group/The Denver Post via Getty Images
  • A new paper looks at "prevailing wage law," which requires a minimum rate for workers on government contracts.
  • The researchers found this practice boosts pay and benefits for workers.

As millions of Americans quit their jobs for a better deal, and service sector jobs struggle to staff up, a little-known wage law might be the key to ending the labor shortage.

That's according to a new paper that looks at prevailing wage law, which is essentially a minimum wage set for workers on government contracts. The laws are meant to create a level playing field for businesses bidding on government contracts, according to study co-author Frank Manzo, executive director of the Illinois Economic Policy Institute. They make sure labor costs are equal across the board and that taxpayer dollars go towards projects that maintain local standards of pay, workforce skill, and quality.

The lesson for the economy is that a mandate for contractor pay ripples out to all workers because private companies are forced to raise their wages to compete for talent. That would also help ease labor shortages sweeping the country as many workers are quitting in search of better pay and benefits.

"The idea is that to combat these labor shortages that we're seeing, the service sector would benefit from wider utilization of state policy instruments that improve job quality for workers, and ensure that employers are competitive in any type of labor market," Manzo said. "And the data shows that prevailing wage laws can deliver on that front."

Workers in states with these laws have higher pay and better benefits

Manzo and his co-author Robert Bruno, a labor professor and director of the Project for Middle Class Renewal at University of Illinois at Urbana-Champaign, specifically looked at earnings for custodians in states with prevailing wage laws and those without, focusing especially on Illinois.


That's' because prevailing wage laws are commonly put in place for construction work, but eight states also extend those laws to service workers. One occupation that's covered in all of those states: Custodians.

They found that in states with prevailing wage laws, wages were higher and benefits were more plentiful, both things that have anecdotally prevented labor shortages. By creating a higher wage standard, the laws could lift all boats, forcing companies to raise pay and therefore making low-paid jobs more middle-class. It would help ease the labor shortages Bruno calls a "Great Refusal," where workers are on the hunt for higher quality jobs.

"For four decades, we've been creating low wage jobs and we can see, quite frankly, the chickens have come home to roost," Bruno said.

Better pay, better benefits, more equity, more stability

Bruno and Manzo found that custodians earned more in states with prevailing wage laws — 6 to 10% more than custodians in states without the laws. They were more likely to be covered by health insurance, and work full-time. They also had lower rates of poverty than their counterparts in states without prevailing wage laws.

"What our study finds is that because of the way prevailing wage laws boost worker incomes, improve health insurance coverage rates, and promote job stability, is that those prevailing wage laws can address this labor shortage," Manzo said. The laws "improve the labor market competitiveness of these custodial service jobs by making them more attractive."


The largest gains from prevailing wage law go to people of color — who are about 34% more likely to be custodians, according to the study. Black custodians in states with prevailing wage laws earn nearly 39% more than their peers in states without the laws. They're also much more likely to have health insurance coverage.

It all adds up to fewer labor shortages

Custodians are one group of essential workers where labor shortages are still raging, as employers struggle to hire more.

"We have this tight labor market where custodians can voluntarily quit and possibly find a better job in the same type of occupation — a better job with better pay, better benefits," Manzo said. "They're going to go to those best pay opportunities, as long as they're available. So by lifting wages and benefits for custodians at state facilities, other employers must respond by raising their pay in order to compete for these workers."

That's what's called a spillover effect. One example is what happens when Amazon comes to town: A working paper found that when a high-paying firm moves in — Amazon pays at least $15 an hour — wages at local businesses rise too to compete.

For now, among low-wage workers, "we've got what seems to be just an unyielding resistance to taking these bad jobs," Bruno said.


"We should be focusing on, well, how does government help this labor market that's really kind of failing in that regard? The way you can do it is with a prevailing wage law that says to someone this is a quality job."