Berkeley Program on Housing and Urban Policy

Recent California legislation extends the application of prevailing wage regulations to subsidized low-income residential construction projects. This paper estimates the cost and supply effects of this legislation. Econometric evidence based on recently completed tax-credit projects in California demonstrates that construction costs increase substantially under prevailing wage requirements. Estimates of additional construction costs in our most extensive models range from 9 to 32 percent. The analysis controls for variations in cost by geographical location and for differences in project characteristics, financing, and developer attributes. We estimate the effect of uniform imposition of these regulations on the number of new dwellings for low-income households produced under the tax credit program. Under reasonable conditions, our mid-range estimate of this prospective decrease exceeds 2,600 units per year.