PREVAILING WAGE LAW is California's "other" minimum wage. It requires workers to be paid union wages on publicly funded construction projects. But in recent years, the law in California has EXPANDED well beyond its initial purpose. It has become a tool for workers to demand union wages on virtually any construction project in California. These claims can increase the cost of a major construction project by millions of dollars--and can be brought years after construction is complete.
The Way DIR Calculates Prevailing Wage Rates Ensures that the "Prevailing Wage" Is Almost Always a "Union Wage"
"Prevailing wage" is a misnomer. Contrary to what the name implies, the prevailing wage is not the wage rate prevailing in a given area. That is the "market rate." Rather, the prevailing wage rate is generally the rate that union workers get paid in a specified area, which is much higher than the market rate.
Why is this the case? It's because the California Prevailing Wage Law requires the Department of Industrial Relations (DIR) to calculate prevailing wages based on the "mode" (or "modal rate"), which greatly favors union wage rates.
The modal rate is the single wage rate that is the most common in a given area. It is very different from the mean (i.e., the "average") or the median (i.e., the middle number), both of which are more intuitive.
Here is a super-simplified example of how it works: say there are nine workers in a region. They are paid the following wage rates: $20.41, $20.45, $20.60, $20.62, $21.00, $21.22, $37.62, 37.62, $37.62.
The first six rates are "market rates" which vary slightly from each other. The last three rates are identical union rates set by a collective bargaining agreement (CBA). Here are the results:
The MEAN (i.e., the "average"): $26.35
The MEDIAN (i.e., the middle number): $21.00
The MODE (i.e., the most common single rate): $37.62
As noted above, the prevailing wage is calculated using the last approach.
That is why prevailing wages favor union rates and are often much higher than what we think of as market rates. In the hypothetical example above, most people would say that the prevailing wage in the market is something in the low to mid-twenties. But the modal rate--and thus the prevailing wage rate--is $37.62. Since CBAs often have the most common single rate in a region, they generally become the official "prevailing wage."
Strange but true!