What do Better Wages Portend for Federal Contract Workers? | DCR Workforce Blog

What do Better Wages Portend for Federal Contract Workers?

GovernmentThe 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:

  • The rate increase won’t take effect until 2015 at the earliest.
  • The change doesn’t affect existing federal contracts, only new ones.
  • The order won’t affect contract renewals unless other terms of the agreement change, such as the type of work or number of employees needed.

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!

age-of-workersMany 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:

  • “Increases in the minimum wage result in increased worker productivity.” Since the last increase in 2009, there has been a significant increase in worker productivity.  However, this is an “across the board’ measurement and not specific to those directly impacted by the minimum wage increase.
  • “To offset the higher wages, companies will be forced to reduce the size of their workforce.”  Again, there is no evidence to support that spikes in lay-offs of minimum wage workers followed the increase in 2009.  There also is no indication that salaries of higher-paid individuals were reduced to accommodate this increase.
  • “The economy benefits as workers spend more rather than saving the incremental revenue.” This statement can be supported, as paychecks for individuals working for minimum wage tend to be dedicated to cost of living expenses.
  • “Companies will actually save money lost through employee strikes and high attrition rates.” As every employer knows, hiring replacement workers would lead to increased costs in hiring, training and generally waiting for the new hires to go up the learning curve and become productive.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.