Long Overdue: Obama to Raise Minimum Wage for Federal Contractor Employees
by Nick Schwellenbach, 1/28/2014
In advance of his State of the Union speech tonight, the White House announced President Barack Obama will sign an executive order – which does not require congressional approval – to raise the wage floor to $10.10 for the lowest paid workers at companies that work on new federal government contracts. This would create a minimum wage for those workers at a rate close to where it would be if it had kept pace with inflation since 1968. Workers helped by the increase would include janitors, food service workers, construction workers, and many others.
The current federal minimum wage is $7.25 an hour, or $15,080 per year for a full-time worker. Like the federal executive branch with its contractors, states and cities can go above and beyond the federal minimum wage floor and sometimes do.
The announcement is an example of the president’s emphasis on actions that can be achievable without Congress. Last year, the legislative branch was very unproductive in terms of substantive laws passed. Obama’s action also may help propel legislation that would create a higher minimum wage for all workers.
The Executive Order Will Help Hundreds of Thousands of Workers
On its merits alone, it is a worthwhile measure, according to the White House.
“A higher minimum wage for federal contract workers will provide good value for the federal government and hence good value for the taxpayer,” according to the White House fact sheet. “Boosting wages will lower turnover and increase morale, and will lead to higher productivity overall. Raising wages for those at the bottom will improve the quality and efficiency of services provided to the government.”
The White House stated that Maryland saw an increase in contractor competition after it required higher minimum wages from its contractors.
This tracks with findings by the National Employment Law Project (NELP), which has also found that low contractor wages lead to greater dependency on public assistance. According to NELP: "Many of the real costs of the federal contracting system, however, are hidden from public view, as low-road contractors who pay poverty-level wages force their employees to rely on public safety net programs for food, housing, and healthcare assistance. An earlier NELP report of states and localities that had adopted contracting policies similar to the President’s proposed executive order found that these policies reduced the hidden public costs of low-wage work, while delivering better quality services for the taxpayer and encouraging more companies who paid decent wages to enter the bidding process."
Estimates vary in terms of how many workers would be helped by Obama’s executive order. The New York Times states that “several hundred thousand workers” will see higher wages. This appears to be based on a study last year by the think tank Demos that estimated that 560,000 private-sector workers working on jobs funded directly by private contracts were paid less than $12 an hour. As noted above, not all these workers would see their pay immediately go up for two main reasons: 1) the executive order will not be retroactive or require renegotiation of existing contracts and only applies to new ones being signed; and 2) many of those estimated 560,000 workers currently make more than $10.10 an hour but less than $12.
“We commend President Obama for using his executive authority to give a boost to hundreds of thousands of hard-working Americans trying to reach the middle class. The nation as a whole benefits from an economy where all workers earn a decent living,” said Demos’s new President Heather McGhee in a statement. “While it’s unfortunate that the order does not apply to existing workers until their contracts are renegotiated, the president’s action adds momentum to the fight for a federal minimum wage increase that would benefit all Americans. In signing this order, the president has done his part. Now it is up to Congress to finish the job.”
The Fair Minimum Wage Act Would Help Tens of Millions
The Fair Minimum Wage Act of 2013, introduced by Sen. Tom Harkin (D-IA) and by Rep. George Miller (D-CA), has won the support of the White House and a large number of Democratic lawmakers in both congressional chambers, yet no Republicans have signed on so far.
The legislation, if it becomes law, would raise the minimum wage to $10.10 by 2015 in three phases of 95 cents each to give businesses time to adapt. Then in 2016 and onwards, the minimum wage would increase with inflation each year. The increases in the average prices of goods and services that an average person buys today are much higher than the increases in the value of the minimum wage over the last 40-some years. That means that without keeping pace with inflation, workers lose ground.
The bill would also raise the federal minimum wage for tipped workers from the current $2.13 an hour to $7.07 an hour – 70 percent of the minimum wage for non-tipped workers. This would be the first increase in the federal tipped minimum wage since 1991.
A House fact sheet on the Harkin-Miller bill says that up to 30 million Americans could see a pay increase and, citing a Fiscal Policy Institute study, the economy could see an annual boost of $33 billion from workers with more money to spend in the economy. “Increased consumer spending equals more jobs. Some economists estimate the wage increase and its effects will result in nearly 300,000 new jobs,” the fact sheet states.
An estimated 55 percent of workers that would benefit from a boost in the federal minimum wage are full-time workers, 56 percent are women, and 88 percent are 20 years old or older, which should put to rest claims that only teenagers work in minimum wage jobs.
A higher minimum wage of the magnitude proposed would be unlikely to lead to any significant job losses, if any at all, according to a review of economic studies. And it would likely reduce government spending that helps the working poor because they would be less poor. Since tax revenues would also rise somewhat along with reduced spending, a minimum wage increase would help cut the deficit.
Obama’s action is a good first step that will begin helping some people immediately. But it will take action in Congress to bring about change that helps a much broader swath of American workers and helps lift many millions out of the economic quicksand they’ve been stuck in for years. A good solution is out there, but is the political will to implement it there as well?
As my article states, the economics literature shows that the employment impact of an increase in the minimum wage is small or zero. Check out this 2013 paper reviewing the literature:
"The employment effect of the minimum wage is one of the most studied topics in all of economics. This report examines the most recent wave of this research – roughly since 2000 – to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers. The weight of that evidence points to little or no employment response to modest increases in the minimum wage."
Regarding your point about productivity in your blog post, productivity has increased extraordinarily, however the gains of productivity increases have not been shared very much with workers. Indeed if the minimum wage had kept up with productivity gains since the late 1960s, the minimum wage would be over $21 an hour by now -- far lower than the minimum wage proposals on the table currently.