Public Comments | Wages, Incomes, and Wealth

EPI comments on proposal to increase the minimum wage for federal contractors

Submitted on August 27, 2021 via regulations.gov

Division of Regulations, Legislation, and Interpretation, Wage and Hour Division
U.S. Department of Labor, Room S–3502
200 Constitution Avenue NW
Washington, DC 20210

Comments on Regulatory Information Number (RIN) 1235-AA41: Increasing the Minimum Wage for Federal Contractors 


SUMMARY

The Economic Policy Institute (EPI) respectfully submits these comments in response to the proposed rulemaking to implement President Biden’s Executive Order 14026, “Increasing the Minimum Wage for Federal Contractors.” EPI is a nonprofit, nonpartisan think tank created in 1986 to include the needs of low- and middle-income workers in economic policy discussions. EPI conducts research and analysis on the economic status of working America, proposes public policies that protect and improve the economic conditions of low- and middle-income workers, and assesses policies with respect to how well they further those goals. 

We believe that a federal contractor minimum wage standard of $15 in 2022, with future indexes linked to inflation, will benefit hundreds of thousands of workers and improve the efficiency of the federal contracting system. We estimate that as many as 390,000 low-wage federal contractors will see a raise under this policy, with the average annual pay increase for affected year-round workers being up to $3,100. Roughly half of workers who would see a raise will be women and roughly half will be Black or Hispanic workers. Because of these reasons, EPI strongly supports the draft regulations.


GENERAL BENEFITS

We largely agree with the Department of Labor’s analysis of the benefits of the proposed rule. As we describe in the next section, our own independent analysis obtains similar findings to the analysis conducted by the Department.

We also appreciate that the proposed rule eliminates subminimum wages that often have roots in discriminatory labor practices and colonialism. The proposed rule correctly eliminates or phases out subminimum wages for workers with disabilities and for tipped workers. The proposed standard would also appropriately apply to US territories like Puerto Rico, where wages are suppressed because current mainland federal contract wage standards do not yet apply.

We agree with the Department of Labor’s conclusions that the “proposed rule would result in negligible or no disemployment effects.” In a comprehensive review of minimum wage research, Dube (2019) concluded that “the overall body of evidence suggests a rather muted effect of minimum wages to date on employment” and “the weight of the evidence suggests any job losses are quite small.” In addition, a federal contracting wage standard is unlike the minimum wage increases studied in that literature: most of the resulting labor cost increases due to a federal contracting standard are funded by government transfers. Therefore there is little incentive for employers to substitute away from low-wage workers in response to the proposed rule.

Indeed, the higher federal contract wage standard will be beneficial for low-wage workers as well as employers. We agree with the Department that a higher contract wage standard will improve the efficiency of the contracting system. In particular, as the Department summarizes, minimum wage increases lead to reductions in turnover and worker separations, the costs of which can be sizable at firms that employ low-wage labor.

We also expect that the quality of federal contract work will improve with a higher minimum wage. Ruffini (2021) provides direct evidence that minimum wage increases at nursing homes improved worker performance and production efficiency. In that study, inspection violations, preventable health conditions, and resident mortality all fell in response to minimum wage increases. 

Higher wages and higher incomes yield additional “downstream” benefits for the rest of the economy. Minimum wages in particular have been shown to improve health and children’s development and to reduce recidivism and property crime (see the review in Godoy and Jacobs 2021).


ANALYSIS

To conduct our analysis of the proposed rule, we estimated the state- and industry-specific sizes of the federal contract workforce and assumed their state- and industry-specific wage distributions were similar to state- and industry-specific overall wage distributions. The analysis was primarily based on three sources of data: (1) FY2020 federal contract obligations from USA Spending (https://www.usaspending.gov/download_center/award_data_archive); (2) Input-output tables from 2019 BLS employment requirements data (https://www.bls.gov/emp/data/emp-requirements.htm); and EPI Minimum Wage Simulation Model results (https://www.epi.org/publication/minimum-wage-simulation-model-technical-methodology/).

Using data from USASpending we calculated the sum of FY2020 total federal contract obligations by state and by 4-digit NAICS, separately classifying contracts to the Postal Service and government entities as these have their own classifications in the BLS employment requirement matrix. There was a total of $617 billion in FY2020 federal contract obligations after removing contracts where the state of performance was unidentified or abroad, or the small numbers of contracts without NAICS codes. 

We also calculated the share of national employment associated with each state-sector combination using the 2019 BLS national domestic employment requirements matrix. We first classified each NAICS-based sector in the contract data into one of roughly 180 BLS sectors in the employment requirements matrix. Then we multiplied the state-sector contract obligations, deflated to 2019 dollars, by the national “direct” jobs in that sector associated with a given amount of spending. The jobs required by all federal contract obligations comprised roughly 1.3% of 2019 employment. 

Finally, we combined these shares with EPI Minimum Wage Simulation Model projections where we assumed the regular and tipped minimum wage rises to $15 in January 2022. This simulation model estimates wage increases for any given minimum wage policy, where the counterfactual hourly wage distribution is based on 2015-2019 American Community Survey and Current Population Survey microdata, and incorporates all future legislated minimum wage increases at the state and substrate-level.

We aggregated the state-sector federal contract employment shares above and the EPI Minimum Wage Simulation Model results to the level of state and 2-digit NAICS sectors. Then, to obtain the state-sector-specific number of federal contract jobs we multiplied the state-sector contractor shares of national employment derived above by projected overall employment in January 2022. We calculated the number of these contract jobs affected by the minimum wage by multiplying the state-sector-specific number of federal contract jobs by the appropriate state-sector-specific share of workers affected by the minimum wage policy. Workers affected by the proposed wage policy of $15 in 2022 are those who would have their wages directly raised to $15, because they would otherwise be earning less than that threshold, and also those earning up to $17.25, as employers adjust pay ladders to account for the higher standard.

Table 1 summarizes the results of this analysis. Using the state- and industry-specific contract employment shares derived above, we project that there will be roughly 1.9 million contract workers in 2022. Our primary estimate is that the proposed rule would raise the wages of about 390,000 people (20.8% of the estimated federal contract workforce).

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Some workers who would otherwise be affected by a $15 minimum wage will already be receiving a higher wage as a result of the Davis-Bacon Act (DBA) or the Service Contract Act (SCA). To account for this possibility, we provide some extreme lower bounds on our primary estimate. First we shrunk the potentially affected workforce by eliminating the construction industry, assuming all construction contracting jobs will have wages above $17.25 per hour in 2022 as a result of the Davis-Bacon Act. Second, to mimic higher wages resulting from DBA or SCA provisions, we raised the underlying wage distribution by an industry-specific union wage premium. These wage premia are estimated using the 2015-2019 Current Population Survey Outgoing Rotation Groups from separate industry-specific (roughly two-digit NAICS) regressions of the log hourly wage on a union status indicator, cubic polynomial in age, and dummy variables for race, gender, educational attainment, state, year, and major occupation. 

Table 1 shows that these provide an extreme lower bound of 226,000 affected workers. This lower estimate likely understates the number of federal contractors affected by the proposed rule. Most importantly, because employers move in and out of federal contracting status, our methodology implicitly underestimates the number of employers affected by the new standard and it does not account for lasting pay increases at employers who were or who would intend to be federal contracts. Miller (2017) provides compelling historical evidence that federal contracting standards affected the labor practices of companies who were previously contractors or who may be contractors in the future. 

Like other minimum wage increases, a federal contract wage standard would reduce racial pay gaps and substantially increase the wages of women. Table 2, which is based on our primary estimate of 390,000 workers affected, shows that half of affected workers are Black or Hispanic, even though these groups comprise a smaller share of the overall workforce. Because they are otherwise paid disproportionately low wages, Black and Hispanic workers would also receive the largest pay increases: an average $3,500 on an annual basis, compared to $3,100 for all affected workers. 187,000 federal contractors that would benefit from the proposed rule are women.

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COMPARISONS TO OTHER ESTIMATES

Our estimates of the numbers affected workers and resulting wage increases are reassuringly in line with other estimates.

The Department uses a broadly similar methodology to the one underlying our analysis, although there are three important differences. First, the EPI Minimum Wage Simulation Model accounts for counterfactual wage growth between 2019 and 2022, including the effects of scheduled state and local minimum wage increases as well as typical wage increases as the economy grows; our understanding is that these factors were not accounted for in the Department’s analysis and they will cause our estimates of affected workers to be smaller than the Department’s estimates. Second, our estimates of affected workers include both directly affected workers who would otherwise be earning less than $15 per hour in 2022, as well as indirectly affected workers earning up to about $17.25 per hour, which were excluded from the Department’s analysis; our inclusion of indirectly affected workers will raise our estimates above the Department’s estimate. Finally, due to a lack of data availability, our estimates excluded counts of affected workers in US territories like Puerto Rico, which the Department appropriately included; our estimates will therefore understate the number of affected workers. Taken together, these three factors largely balance each other out, so that the Department’s estimate of 327,300 affected workers falls close to the middle of our range of 226,000 to 390,000.

Our estimates of wage increases, and the Department’s, also agree with an analysis by Curt et al. (2021), which found that the Executive Order would increase federal spending by $1 to $2 billion in 2022. Table 2 shows that our estimated total pay increase is within this range, at roughly $1.2 billion. Similarly, the Department’s estimate for employer costs and transfers is $1.5 billion. 


CONCLUSION

The wage standard of $15 per hour is an important and necessary step in ensuring that federal contract workers have good jobs. While it does not eliminate all low-road and harmful labor practices such as forced arbitration and class action waivers, the wage increases resulting from the proposed rule will directly improve the lives of hundreds of thousands of workers and will improve the efficiency of the federal contract system by increasing employee retention and productivity. For these reasons, EPI strongly supports the Department’s proposal to increase the minimum wage for federal contractors.

Thank you for the opportunity to comment on this important issue and please do not hesitate to contact us with any questions.

Sincerely,

Ben Zipperer
Economist
Economic Policy Institute

Heidi Shierholz
Senior Economist and Director of Policy
Economic Policy Institute

 

References

Cote, Curt, Christina Kloster, Kelly Seacrist, Rij Patel. 2021. “Minimum-Wage Executive Order Could Disrupt Acquisition Workforce.” Censeo Insights, 

https://www.censeoconsulting.com/insight/operational-improvement/minimum-wage-executive-order-could-disrupt-acquisition-workforce/.

Dube, Arindrajit. 2019. Impacts of Minimum Wages: Review of the International Evidence. Report prepared for Her Majesty’s Treasury (UK). November. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/844350/impacts_of_minimum_wages_review_of_the_international_evidence_Arindrajit_Dube_web.pdf

Godoy, Anna and Ken Jacobs. 2021. “The Downstream Benefits of Higher Incomes and Wages.” Federal Reserve Bank of Boston Discussion Paper 2021-1, April. https://www.bostonfed.org/-/media/Documents/cddp/cddp2101.pdf

Miller, Conrad. 2017. “The Persistent Effect of Temporary Affirmative Action.” American Economic Journal: Applied Economics, 9(3), July. http://doi.org/10.1257/app.20160121

Ruffini, Krista. 2021. “Worker Earnings, Service Quality, and Firm Profitability: Evidence from Nursing Homes and Minimum Wage Reforms.” Working Paper. https://drive.google.com/file/d/1d6vYu_uN9keb9iiT2R5UJihA_61K0Fce


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