Prevailing Wage Would Make California’s Housing Crisis Worse – Pacific Research Institute

Prevailing Wage Would Make California’s Housing Crisis Worse


California has a grim housing problem and nearly everyone in the state, whether they have tried to buy or rent a home or not, is aware of it. Apparently, though, some in Sacramento haven’t noticed and hope to mix in more of the poison that created the crisis in the first place.

Middle-class Californians can’t even afford a median-priced home. Yet Democratic Assemblyman Kansen Chu of San Jose has introduced a bill that, if it becomes law, will only spread the hopelessness. Assembly Bill 199, which looks to be on a fast track through a Legislature with a history of accommodating unions, would require private housing developers on projects in which a government “subdivision” has a role, to pay workers on the job the “prevailing wage.”

According to the California Department of Industrial Relations, “The prevailing wage rate is the basic hourly rate paid on public works projects to a majority of workers engaged in a particular craft, classification or type of work within the locality and in the nearest labor market area.” In practice, this means builders will have to pay more than the market value for labor. Cynics might argue the prevailing wage is set by the government simply letting local unions decide what it is. Given that there has long been a cozy relationship between government and organized labor, that’s plausible.

As the Pacific Research Institute has documented in a new issue brief, the state is suffering a profound housing crisis. San Francisco (first), San Jose (third), Los Angeles (fifth) and San Diego (ninth) are among the costliest housing markets in the country. The median home price across the state is $428,000, third highest in the nation. Fewer than one-third of Californians can afford a median-price home, according to an economist with the California Association of Realtors. In no other state do homeowners and renters pay a larger portion of their incomes toward housing.

The high costs are the result of a severe shortage of housing stock, created by a series of poor public policy choices that have sidelined the financial incentives to build new units. Chu’s legislation would contribute to the tangle as escalating labor costs will drive housing prices even higher. According to Beacon Economics, prevailing wage could increase the costs of residential home construction by 46 percent. Even half of that would be devastating.

Estimates from the Building Industry Association indicate that the proposal would boost the cost of a 2,000-square-foot home in San Diego County by about $90,000. The Business Council of San Joaquin County says that AB199 would increase the cost of a 1,500-square-foot home there by $75,000.

To put those numbers in perspective, consider this bit of analysis from the National Association of Home Builders: For every $1,000 added to the price of a California home, more than 15,000 households are forced out of the market.

If Chu’s proposal were to be enacted into law, those who do find homes would run into an entire new set of problems. California Building Industry Association Senior Vice President Frank de Lima says AB199 could force “millions who are living at or near poverty into an even more desperate situation.”

“When housing costs rise,” he said, “families are forced to shift their spending away from basic needs like food and health care.”

Though the law will supposedly apply only to projects in which a government “subdivision” has a clear role, Builder magazine reports that “home builders, housing economists, design, development, and manufacturing partners believe that ambiguity” in the bill “may be intentional.” Since a law mandating that prevailing wage be paid on publicly funded construction projects already exists, the objective of AB199 then, one could logically assume, is to apply the law to all homebuilding and set aside the entirety of residential construction in the state for the unions.

AB199 would also affect more than just the already distorted-beyond-functionality housing market. It would hurt those it’s supposedly intended help by pricing a wide slice of wage earners of out the job market. No longer will they be able to compete with other workers by offering to do the same job at a more competitive price. They should have the same right as businesses, which, outside of instances of government-imposed price floors, are free to offer lower prices in order to win customers.

California’s housing crunch will not ease until lawmakers start peeling off the slabs of fetid public policy they’ve stacked up for decades. Chu’s bill will not only make things uglier, it will handicap any efforts to end the crisis.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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