Using stochastic frontier regression to estimate the construction cost inefficiency of prevailing wage laws

Abstract

PurposeThe aim of this paper is to use stochastic frontier regression to measure the effect of the introduction and expansion of prevailing wage requirements on the cost efficiency of public school construction in British Columbia. The results provide evidence from a specific sector and location that contributes to the accumulated evidence on the topic.Design/methodology/approachStochastic frontier regression is used to measure the effect of the introduction and expansion of prevailing wage requirements on the cost efficiency of public school construction in British Columbia. The results of a likelihood ratio test indicate that stochastic frontier regression is preferred to OLS cost estimation because of the presence of statistically different cost inefficiencies across a sample of covered and uncovered projects.FindingsSpecifically, projects covered by the introductory stage of the wage requirements are significantly less cost efficient compared to other public school projects. However, by the time of the expansion of the wage policy 17 months later, covered projects were no more cost inefficient than other projects. The results indicate that if prevailing wage laws are associated with changes in the cost efficiency of construction, stochastic frontier regression is the preferred estimation technique.Research limitations/implicationsThis is the first study of its kind with results specific to school construction in British Columbia. Further research based on data from other projects may/may not confirm the existence of differences in construction cost inefficiencies for projects covered by construction wage policies.Social implicationsBy implication, the results suggest that if the cost inefficiency of prevailing wage laws is short‐lived, the impact on the total cost of construction may similarly be ephemeral. The results imply that prevailing wage regulations do not contribute to long‐run construction cost inefficiency.Originality/valueThis is the first study to use stochastic frontier regression to examine the cost inefficiencies associated with prevailing wage laws. Previous studies that examine the effect of the wage policy on construction costs are based on OLS estimation.