Thursday, February 01, 2007

Pro-Union Labor Laws and the Rising Cost of Urban Infrastructure Projects

The other day, the New York Times reported that New York City is having trouble completing transit projects because of high bids by potential contractors. I offered a conjecture that bidder collusion may be part of the explanation. I’ve received some interesting e-mails and would like to offer a slightly revised explanation.

Some states are Right to Work states while other states are not. New York State is in the latter category. This means that labor unions are well treated in this state. New York City has signed a PLA.

“A Project Labor Agreement (PLA) is a pre-hire collective bargaining
agreement between an owner (in this case the New York's Metropolitan
Transportation Authority) and labor unions that mandate, among other things, that all workers be hired out of the union hiring halls. In return for this exclusive access to work, the unions agree not to strike or cause other disruptions to the job.

The problem with PLAs is they discriminate against a majority of
construction workers, who choose not to belong to a union, by not allowing them to participate on a PLA project. According to the U.S. Department of Labor and, open shop contractors (non-union) make up 75.3 percent of the private construction industry in New York.”

While this creates “good jobs” for the union workers, this reduces the competition for the contracts. The only firms at risk to get the public sector contract are the unionized firms. If these firms are able to collude, by agreeing to not bid on each other’s favorite contracts, then both these firms’ capitalists and workers will all do great.

The losers from this cozy setup are taxpayers in New York City who receive a high tax bill per dollar of services received and the workers and owners of non-union firms who were never at risk to receive the contract.

The PLA acts as a barrier to entry impeding non-union firms from bidding on public sector contracts. This should help the unionized firms to collude because it is easier to collude among a smaller set of firms who already have pre-existing relationships. If construction firms can freely enter the contract bidding then collusion among incumbent bidders will not be effective at raising the offer.

My theory can be tested! Similar to Tom Holmes’ JPE paper in 2000, a researcher could collect data on contract bids for similar transit projects in cities in Right to Work states and compare them to contract bids for similar transit projects in cities located in Non-Right to Work states that are adjacent to Right to Work states. This design would identify the role of unionization in affecting the cost structure of doing public investment.

If there was free entry in bidding for contracts, collusion would be less likely and taxpayers would get a better deal. Of course, the city government would need a mechanism to judge the quality of the work conducted and to reward or punish the firm accordingly.

The bigger issue here is the cost of building a “Green City” in pro-labor towns such as New York City, Boston and San Francisco. If public infrastructure projects are more expensive (due to the union wage premium), then taxpayers will be less willing to invest in them. The net result is a public infrastructure capital stock that is 2nd rate.