Building A Better Model
For Construction Wages

Many of the people building decent, low-cost housing in New York City are not earning decent wages. But according to a new study, the city cannot afford to pay those workers any better unless it dramatically scales back its affordable housing plans.

The city's Department of Housing Preservation and Development (HPD) is in the middle of a $7.5 billion initiative to preserve or build 165,000 units of affordable housing. As has been true historically, most affordable housing today is built by nonunion laborers who earn significantly lower wages than union tradespeople.

Unions and some analysts have called for subjecting affordable housing to "prevailing wage" rules, which link workers' pay to local collective bargaining agreements. They say the lack of wage rules in affordable housing invites a race to the bottom in which contractors pay low wages and offer few or no benefits, permit unsafe working conditions and produce shoddy buildings—all on the public's dime.

But a report issued last month by the Citizens Housing and Planning Council, a nonprofit research and advocacy organization headed by former HPD commissioner Jerilyn Perine, finds that imposing so-called "prevailing wages" on affordable housing projects would boost construction costs significantly, forcing major changes to the mayor's program – which the administration has already acknowledged is going to take longer than desired to accomplish its goals.

Cost concerns

Affordable housing is usually paid for by a combination of city or state subsidies, federal funding via Low Income Tax Credits, and sale or rental revenue capped at 30 percent of tenants' income.

Estimates of the cost impact of prevailing wages are all over the map. Several previous reports have found that prevailing wage laws do not increase overall costs because union labor is more productive. On the other hand, estimates by researchers who have found a cost increase range from an 11 percent increase in one study of projects in California, to a 48 percent jump detected in hypothetical projections about New York City construction.

According to a white paper issued in December by the New York State Association for Affordable Housing (NYSAFAH), a trade group for affordable housing developers, the developer of a 151-unit affordable housing project in Brooklyn recently "sought construction bids at both fair market and prevailing wage rates." The result: "Construction costs under fair market wages were approximately $30 million. The prevailing wage bids ranged up to $43 million, a 42 percent increase. The project would require $13 million of additional public subsidy to cover this increased cost."

CHPC's own calculation is that, even if better-paid labor is more productive, a prevailing wage rule would increase affordable housing costs by 25 percent. That cost would have to be covered. "You're either going to reduce the number of units you produce, or your going to make those units available to people with higher incomes, or you need more subsidies, which in this environment, we don’t think is going to happen," says Harold Shultz, CHPC's senior fellow. "You don’t get it for free."

Making things more complicated is the fact that many government subsidy programs for building affordable housing are linked to the incomes of the people who will live there. If higher costs force higher rents, and higher rents require higher-income tenants, the developer could lose eligibility for funding through Low Income Housing Tax Credits or other programs.