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Federal Register / Vol. 86, No. 138 / Thursday, July 22, 2021 / Proposed Rules a. Improved Government Services The Department expects the quality of government services to improve when the minimum wage of Federal contract workers is raised. In some cases, higherpaying contractors may be able to attract higher quality workers who are able to provide higher quality services, thereby improving the experience of citizens who engage with these government contractors. For example, a study by Reich, Hall, and Jacobs 2003 found that increased wages paid to workers at the San Francisco airport increased productivity and shortened airport lines.82 In addition, higher wages can be associated with a higher number of bidders for Government contracts, which can be expected to generate greater competition and an improved pool of contractors. Multiple studies have shown that the bidding for municipal contracts remained competitive or even improved when living wage ordinances were implemented Thompson and Chapman, 2006.83

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b. Increased Morale and Productivity Increased productivity could occur through numerous channels, such as employee retention and level of effort. A
strand of economic research, commonly referred to as efficiency wage theory, considers how an increase in compensation may be met with greater productivity.84 Efficiency wages may elicit greater effort on the part of workers, making them more effective on the job.85 Increases in the minimum wage has also been shown to increase worker morale and consequently productivity. Kim and Jang 2019
showed that wage raises increase productivity for up to two years after the wage increase.86 They found that in both full and limited-service restaurants productivity increased due to improved worker morale after a wage increase.
Potentially, higher morale leading to increased productivity can also lead to additional productivity gains. Mas and 82 Reich, M., P. Hall, and K. Jacobs. 2003.
Living Wages and Economic Performance: The San Francisco Airport Model, Institute of Industrial Relations, University of California, Berkeley.
83 Thompson, J. and J. Chapman. 2006. The Economic Impact of Local Living Wages, Economic Policy Institute, Briefing Paper 170, 2006.
84 Akerlof, G.A. 1982. Labor Contracts as Partial Gift Exchange. The Quarterly Journal of Economics, 974, 543569.
85 Another model of efficiency wages, which is less applicable here, is the adverse selection model in which higher wages raise the quality of the pool of applicants.
86 Kim, H.S., & Jang, S. 2019. Minimum Wage Increase and Firm Productivity: Evidence from the Restaurant Industry. Tourism Management 71, 378
388. https doi.org/10.1016/j.tourman.2018.10.029.

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Moretti 2009 found that the presence of high-productivity grocery store cashiers was an implicit social pressure that encouraged low-productivity grocery store cashiers to perform better, especially those nearest and within line of sight of the high productivity employee.87 Taken together, these publications provide evidence that increasing the minimum wage increases morale and productivity directly.
Furthermore, as morale directly increases productivity for some workers, this may lead to increased productivity in others. The Department believes that this proposed rule could increase productivity for the Federal contracting community as well.
c. Reduced Turnover An increase in the minimum wage has been shown to decrease both turnover rates and the rate of worker separation Dube, Lester and Reich, 2011; Liu, Hyclak and Regmi, 2015; Jardim et al., 2018.88 This decrease in turnover and worker separation can lead to an increase in the profits of firms, as the hiring process can be both expensive and time consuming. A review of 27
case studies found that the median cost of replacing an employee was 21
percent of the employees annual salary.89 One manager of a fast-food restaurant Hirsch, Kaufman and Zelenska, 2011 90 when interviewed, estimated that each turnover cost $300
$400. Fairris et al. 2005 91 found the cost reduction due to lower turnover rates ranges from $137 to $638 for each worker. Managers of various 87 Mas, A., & Moretti, E. 2009. Peers at Work.
American Economic Review 991, 11245. https
www.aeaweb.org/articles?id=10.1257/aer.99.1.112.
88 Dube, A., Lester, T.W., & Reich, M. 2011. Do Frictions Matter in the Labor Market? Accessions, Separations, and Minimum Wage Effects.
Discussion Paper No. 5811. IZA. https
www.iza.org/publications/dp/5811/do-frictionsmatter-in-the-labor-market-accessions-separationsand-minimum-wage-effects.
Liu, S., Hyclak, T.J., & Regmi, K. 2015. Impact of the Minimum Wage on Youth Labor Markets.
Labour 294. doi: 10.1111/labr.12071.
Jardim, E., Long, M.C., Plotnick, R., van Inwegen, E., Vigdor, J., & Wething, H. 2018, October.
Minimum Wage Increases and Individual Employment Trajectories Working paper No.
25182. NBER. doi:10.3386/w25182.
89 Boushey, H. and Glynn, S. 2012. There are Significant Business Costs to Replacing Employees.
Center for American Progress. Available at: http
www.americanprogress.org/wp-content/uploads/
2012/11/CostofTurnover.pdf.
90 Hirsch, B.T., Kaufman, B.E., & Zelenska, T.
2011. Minimum Wage Channels of Adjustment.
Discussion Paper No. 6132. IZA. https
www.iza.org/publications/dp/6132/minimum-wagechannels-of-adjustment.
91 Fairris, D., Runstein, D., Briones, C., &
Goodheart, J. 2005. Examining the Evidence: The Impact of the Los Angeles Living Wage Ordinance on Workers and Businesses. LAANE. https
laane.org/downloads/Examinig_the_Evidence.pdf.

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traditionally low-wage firms explained that in nearly all instances, increased wages led to both a decrease in turnover and an increase in profits. Howes 2005
discovered that as San Francisco increased the city-wide minimum wage to $10 between 1997 and 2001 $4.85
above the then Federal minimum of $5.15 the turnover rate fell 31 percent for all healthcare providers and 57
percent for new healthcare providers.92
Although the impacts cited here are not limited to Federal contracting, because data specific to Federal contracting and turnover are not available, the Department believes that a reduction in turnover could be observed in among workers on Federal contracts following this proposed rule.
The potential reduction in turnover is a function of several variables: The current wage, hours worked, turnover rate, industry, and occupation.
Therefore, the Department has not quantified the impacts of potential reduction in turnover for Federal contracts.
d. Reduced Absenteeism Studies on absenteeism have demonstrated that there is a negative effect on firm productivity as absentee rates increase.93 Zhang et al., in their study of linked employer-employee data in Canada, found that a 1 percent decline in the attendance rate reduces productivity by 0.44 percent.94 Allen 1983 similarly noted that a 10percentage point increase in the absenteeism corresponds to a decrease of 1.6 percent in productivity.95 Fairris et al. 2005 demonstrated that as a workers wage increases there is a reduction in unscheduled absenteeism.96 They attribute this to workers standing to lose more if forced to look for new employment and an 92 Howes, C. 2005. Living Wages and Retention of Homecare Workers in San Francisco. Industrial Relations 441, 139163. https
onlinelibrary.wiley.com/doi/abs/10.1111/j.00198676.2004.00376.x.
93 Allen, S. G. 1983. How Much Does Absenteeism Cost? Journal of Human Resources, 183, 379393. https www.jstor.org/stable/
145207?seq=1.
94 Zhang, W., Sun, H., Woodcock, S., & Anis, A.
2013. Valuing Productivity Loss Due to Absenteeism: Firm-level Evidence from a Canadian Linked Employer-Employee Data. Health Economics Review, 73. https
healtheconomicsreview.biomedcentral.com/
articles/10.1186/s13561-016-0138-y.
95 Allen, S. G. 1983. How Much Does Absenteeism Cost? Journal of Human Resources, 183, 379393. https www.jstor.org/stable/
145207?seq=1.
96 Fairris, D., Runstein, D., Briones, C., &
Goodheart, J. 2005. Examining the Evidence: The Impact of the Los Angeles Living Wage Ordinance on Workers and Businesses. LAANE. https
laane.org/downloads/Examinig_the_Evidence.pdf.

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