WILL THE EXECUTIVE ORDER RAISING THE MINIMUM WAGE HURT CONTRACTORS?

On February 12, 2014, President Obama issued Executive Order 13658, increasing the hourly minimum wage paid by federal contractors from $7.25 to $10.10.  The minimum wage for tipped workers will also increase from $2.13 to $4.90 per hour. These rates will be increased annually based on increases in the Consumer Price Index (decreases in the CPI will not result in a decrease in the minimum wage). The executive order will affect all new federal contracts signed on or after January 1, 2015.

It is unclear how the minimum wage increase will actually affect federal contractors and the tax payers. Labor Secretary Thomas Perez stated at a press conference that wages will increase for “hundreds of thousands,” although the Labor Department does not have any actual data on the potential effect of the executive order.

DCI’s analysis suggests that the executive order is largely symbolic and will have a minimal effect on most federal contractors: 97.1% of our clients’ non-union employees are already paid at or above $10.10 per hour.  Of course, the executive order will have a larger effect on some contractors more than others. Whereas the increased minimum wage will have a negligible effect on most defense contractors, it is potentially devastating for contractors with a higher percentage of lower paid employees (e.g., janitorial, retail); especially if the federal contracts are only a small portion of the contractor’s revenue.  Such contractors will be forced either to increase what they charge the federal government or opt to no longer be a federal contractor.

Both President Obama and Secretary Perez believe that the executive order will not increase the cost of new contracts to tax payers nor will contractors raise their contract amounts to pay for the increase in the minimum wage. According to Secretary Perez,

We estimate that the executive order will benefit hundreds of thousands of people directly by increasing their pay, but it will also improve taxpayers’ return on their investment.  Higher wages make for a more productive workforce, thus improving the quality and efficiency of services provided to the government.

All federal agencies will be doing this within their existing budget.  And the reason why this is the efficient thing to do is because when employers are paying a fair wage, they have a more efficient workforce.  And when you have a workforce where you have less attrition, you have those sorts of efficiencies.  So we’re confident that just like so many other private sector companies that have paid a fair wage and have low attrition and an efficient and effective workforce, that we will realize the same efficiencies here in the federal government.

The President has said many times that the federal government should set the example, and that’s exactly what we’re doing here.

If the federal government is setting the example here, it is puzzling why they did not also raise the minimum wage for federal employees. Although most federal employees are paid higher than $10.10 per hour, the minimum wage for the federal government itself is only $8.62 per hour (Grade 1, Step 1 of the 2014 general schedule).

By Mike Aamodt, Ph.D., Principal Consultant, DCI Consulting Group

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