The perennial debate on wages always asks: Do better wages translate to increased productivity and more customers (with deeper pockets) for businesses – or less employment as employers reduce the number of workers in an attempt to control costs?
That debate has once again moved to the forefront. During his State of the Union speech Tuesday evening, President Obama announced that he will sign an executive order setting the minimum wage for workers covered by new federal contracts at $10.10 an hour. This action is being taken in reaction to the inability to convince congress to pass this legislation.
Executive power is not the focus on this blog. Others are more qualified to speak to whether the President has legal authority to issue an order that conflicts with current federal minimum wage legislation passed by Congress. For us, the significant questions are: will this increase truly improve the standard of living for federal contract workers? Or, will it result in job losses?
If this becomes law, the minimum wage for federal contract workers will be raised to $10.10 from $7.25. An assessment of the current wages paid to the 2.2 million federal contract workers would indicate that the increase would only cover about 10 percent of the overall population, since the majority of those employees already make more than $10.10. These low wage workers tend to fill various roles in laundry, janitorial work and food service. Other factors also limit its impact:
Considering that the last revision occurred in 2009 and was never indexed to inflation, many are asking whether this order will include an inflation wage index. A recent study of federal contract workers making less than $10 per hour showed that 20 percent were dependent on Medicaid for health care, and 14 percent used food stamps.
What is the total impact on the economy? Unfortunately, it is too soon to tell. Increasing the wages of federal contract workers could increase government spending, but this may be offset by reductions in Medicaid and food stamp expenditures. Most federal contract workers are supplied by private companies. It is also to be seen if these companies will pass on the total increase to the government, or absorb some of it, adopting some cost cutting measures in other quarters. Most economists predict that the impact on government spending will be nominal.
Many believe this action would also have spillover effects on the wages of other low-paid workers. Although the executive order would not pertain to workers in the private sector, the President urged congress to quickly take action to raise the minimum wage for all workers to $10.10. Discussions of the impact of that legislation rapidly become polarized, as the change would impact a far greater population, and potentially have a significant impact on the economy.
According to the Bureau of Labor Statistics there are about 3.6 million workers at the minimum wage. That represents 2.5 percent of the total U.S. workforce. Within that group, 55 percent are 25 years old or younger. That leaves only about 1.1 percent of all workers (approximately 1.6 million workers) over 25 earning the minimum wage. We need to further consider the demographics of these workers. Of those under the age of 25, 31% are teenagers. We can only assume that the vast majority are not heads of households. The remaining 24% under 25 years of age are a combination of first, second and third earners in a family. While this population may be considerably smaller than perceived, this still means that nearly 2 million workers over the age of 25 are earning the minimum wage!
Many businesses have taken proactive steps, establishing ‘fair minimum wages’ for their own workers. Companies like Costco have been paying $11.50 at all store locations. The average wages of a Costco employee work out to $17 per hour, and according to Harvard Business Review, Costco enjoys less employee turnover and theft, and greater productivity as a result of this policy.
Historically, what has been the impact of increasing minimum wage? Let’s examine some of the rhetoric:
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