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Lift in minimum wage will have little economic impact

Richard McGregor
Tuesday, 28 Jan 2014 | 6:01 PM ET
McDonald's french fries being prepared.
Daniel Acker | Bloomberg | Getty Images
McDonald's french fries being prepared.

A higher minimum wage for federal contractors will have almost no economic effect in a vivid demonstration of the limits to U.S. President Barack Obama's plans for a "year of action" via executive orders.

Mr. Obama said he would raise the minimum wage for workers on federal contracts from $7.25 to $10.10 an hour and then index it to inflation as he called for a legislative increase in the overall minimum wage.

But only a tiny number of workers will receive any benefit while economists continue hotly to dispute the broader merits of minimum wages as an anti-poverty program.

According to the White House, the kinds of contractors who will benefit from the minimum-wage boost are janitors, construction workers and those who wash dishes, serve food and do laundry on military bases.

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Democratic groups who have lobbied for a higher minimum wage welcomed the move and its symbolism. "The president clearly shares the frustration of working families waiting for Congress to pass an urgently needed and overdue increase in the federal minimum wage," said Christine Owens of the National Employment Law Project.

"Thankfully he is moving ahead with this important step to boost pay for workers struggling to afford the basics."

(Read more: There's no shame in starting at the bottom)

A study by the think-tank Demos finds 560,000 workers who earn less than $12 an hour are funded through direct federal contracts. The number who make the minimum wage will be smaller: perhaps a couple of hundred thousand.

A full-time worker who now earns the minimum wage of $7.25 an hour will earn $14,500 a year, assuming a 40-hour week and 50 weeks of work. Raising that to $10.10 would boost their annual income to $20,200.

Schiff: Minimum wage a job killer
CNBC's Brian Sullivan discusses the impact of raising the minimum wage to $10.10 with Euro Pacific Capital's Peter Schiff.

Assuming that 200,000 workers received the full boost, this would amount to an extra $1.14 billion in pay, with the real benefit depending on whether the recipients are married or have children,and thus whether they lose tax credits because of their higher income.

That is a tiny fraction of the overall economy, showing that even Mr Obama's flagship executive order will have no significant macroeconomic effects.

On the other side of the ledger, that extra pay will have to come either from the federal budget, contractor profits or higher productivity. Given tight caps on federal spending, Mr Obama can ill afford much inflation in the price of government contracts.

(Watch: Minimum wage doesn't hike doesn't negatively impact jobs)

John Boehner, Republican speaker of the House of Representatives, was quick to make that argument. "I think the question, Mr President, is how many people will this executive action actually help? I suspect the answer is somewhere close to zero," he said. "When it comes to the federal minimum wage, I used to be an employer. When you raise the cost of something you get less of it."

The White House said that paying higher wages would increase productivity and thus it would not impose such a cost on the federal budget.

"Boosting wages will lower turnover and increase morale, and will lead to higher productivity overall," it argued in a fact sheet on the policy. "Raising wages for those at the bottom will improve the quality and efficiency of services provided to the government." There is some evidence for so-called "efficiency wages" but the topic remains disputed.

(Read more: Companies may be poised for a minimum wage windfall)

The same is true in broader debate about minimum wages: in particular the long-vexed question of whether they lead to higher pay for some workers but job losses for others.

Republicans have clearly signaled that they will not support Mr Obama's push for an overall minimum-wage increase.

—By The Financial Times

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