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Federal Register / Vol. 86, No. 138 / Thursday, July 22, 2021 / Proposed Rules implementation costs for new hires in later years because the cost to set wages would be similar for new hires under the baseline scenario and this proposed rule. The Department believes new hires would have a starting pay rate of at least $15 per hour, rather than starting slightly below and then receiving a raise when the contract is renewed.
Assuming all costs are in Year 1, the average annualized implementation costs over ten years, using a 7 percent discount rate, is $538,500.
Finally, the actual number of affected employees may be underestimated because the analysis assumes workers are working exclusively on Federal contracts. The Department tried to take this into account when it estimated the amount of time per affected employee.
If this has not been adequately reflected in the time cost estimates, then the total costs may be underestimated.

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c. Other Potential Costs and Eventual Bearers of Transfers In addition to the costs discussed above, there may be additional costs that have not been quantified. These include compliance costs, increased consumer costs, and reduced profits.
The latter two hinge on the belief that employers costs will increase by more than the associated productivity gains and cost-savings. The Department believes the benefits to firms will outweigh the costs and hence adverse impacts to prices or profits are unlikely.
These are discussed here for completeness.
i. Compliance Costs This proposed rule requires Federal executive departments and agencies to include a contract clause in any contract covered by the Executive order. The clause describes the requirement to pay all workers performing work on or in connection with covered contracts at least the Executive order minimum wage. Contractors and their subcontractors will need to incorporate the contract clause into covered lowertier subcontracts. The Department believes that the compliance cost of incorporating the contract clause will be negligible for contractors and subcontractors. Contractors subject to the SCA and/or DBA have long had a comparable flow-down obligation for the compliance of subcontractors by operation of the SCA and DBA. Thus, upper-tier contractors flow-down responsibility, and lower-tier subcontractors need to comply with prevailing wage-related legal requirements so that upper-tier contractors do not incur flow-down liability, are well understood concepts
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to SCA and DBA contractors. See 29
CFR 5.5a6 and 4.114b. While the flow-down structure may be less familiar to some sub-set of contractors subject to the Executive order, this will substantially reduce the number of contractors with no familiarity with flow-down liability.
ii. Consumer Costs In general, the relevant consumer is the Federal Government. If the rulemaking increases employers costs once offsetting productivity gains and cost-savings, and contractors pass along part or all of the increased cost to the government in the form of higher contract prices, then Government expenditures may rise though, as discussed later, benefits of the Executive order are expected to accompany any such increase in expenditures. Because direct costs to employers and transfers are relatively small compared to Federal covered contract expenditures, the Department believes that any potential increase in contract prices will be negligible less than 0.4 percent of contracting revenue, see section IV.C.vi..
In some instances, such as concessions contracts, increased contractor costs may be passed along to the public in the form of higher prices.
However, because employer costs are relatively small, any pass-through to prices will be small. The literature tends to find that minimum wages result in increased prices, but that the size of that increase can vary substantially.
Ashenfelter and Jurajda 2021 62 found that wage increases resulted in full or near-full price pass-through to the cost of a Big Mac, estimated to be about 70
percent. Basker and Khan 2016 note that, even with full price passthrough, the income effect of a price increase is likely to be very small. The average price of a burger in 2014, according to the C2ER data used in this paper, was approximately $3.77. Thus, for example, a 3 percent increase in this price amounts to only about 10
cents. 63 Echoing the minimal anticipated price increase, Lemos 2008
found that an increase in the minimum wage of 10 percent raises food prices by 62 Ashenfelter, O., & Jurajda, S. 2021. Wages, Minimum Wages, and Price Pass-Through: The Case of McDonalds Restaurants. IRS Working Papers, Report No. 646. https dataspace.princeton.edu/
bitstream/88435/dsp01sb397c318/4/646.pdf.
63 Basker, E., & Khan, M.T. 2016. Does the Minimum Wage Bite into Fast-Food Prices?
Industrial Organization: Empirical Studies of Firms & Markets eJournal. https dx.doi.org/10.2139/
ssrn.2326659.

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no more than 4 percent, and overall prices by no more than 0.4 percent.64
iii. Reduced Profits If employer costs outweigh productivity and cost-savings gains, then companies will either pass these additional costs on to consumers discussed above or incur smaller profits. There is very little literature showing a link between minimum wages and profits. One paper by Draca et al. 2011 did find a substantial negative link between minimum wages and profits in the United Kingdom.65
However, because the increase in gross costs is such a small share of contracting revenue less than 0.4 percent, see section IV.C.5. in this case, the average impact on profits will be negligible.
Impacts to profits may be larger for firms that pay lower wages, for firms with more affected workers, and for firms that cannot pass increased costs onto the government or the consumer.
3. Transfer Payments The Department estimated transfer payments to workers in the form of higher wages. Directly, these are transfers from employers to the employees; however, ultimately these transfer costs to firms may be offset by higher productivity, cost-savings, or cost pass-throughs to the government and consumers. The Department believes negative impacts on employment or benefits will be small to negligible.
Additionally, some workers currently earning at least $15 per hour may also receive pay raises due to spill-over effects. This is also discussed qualitatively.
Many papers have found increased earnings for low-wage workers associated with a minimum wage increase. The Congressional Budget Offices CBOs 2019 paper provides an overview of this literature.66 Based on this research, economists have continually found that increasing the minimum wage can, under certain conditions, increase earnings and alleviate poverty. The CBO 2019
estimates a national $15 per hour minimum wage, implemented by 2025, could raise earnings for 27 million 64 Lemos, S. 2008. A Survey of the Effects of the Minimum Wage on Prices. Journal of Economic Surveys, 221, 187212. https
onlinelibrary.wiley.com/doi/abs/10.1111/j.14676419.2007.00532.x.
65 Draca, M., Machin, S., & Van Reenen, J. 2011.
Minimum Wages and Firm Profitability. American Economic Journal: Applied 31, 129151. doi:
10.1257/app.3.1.129.
66 CBO. 2019, July. The Effects on Employment and Family Income of Increasing the Federal Minimum Wage Publication No. 55410. https
www.cbo.gov/publication/55410.

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