The Effect of “Federal -Aid Swap” Programs and Davis-Bacon Prevailing Wages on Highway Construction Costs and Contractor Composition: Evidence From Iowa

Abstract

“Federal-aid swap” programs allow states and local governments to bypass federal Davis-Bacon prevailing wages and Disadvantaged Business Enterprise (DBE) goals by exchanging federal funds that have been allocated to highway projects with state funds. The Iowa Department of Transportation approved a federal-aid swap program in February 2018. Using data on more than 1,200 highway construction projects in Iowa from 2016 to 2020, I find that the cost of projects in the federal-aid swap program are not statistically different from those that were not swapped, after accounting for project size and complexity, project type, and project location. Regression results indicate that Davis-Bacon prevailing wages and DBE goals have no effect on total construction costs. However, the federal-aid swap program is statistically associated with a decrease in the likelihoods that a project is covered by the Davis-Bacon Act by 10 percentage points and DBE goals by 4 percentage points. Because the payment of Davis-Bacon prevailing wages is statistically associated with an 8 percentage-point decrease in the chances that a highway project is awarded to an out-of-state contractor, the federal-aid swap program may have increased the market share of out-of-state contractors at the expense of Iowa-based contractors.