President Obama's executive order raising the minimum wage from $7.25 to $10.10 an hour covers employees of federal government contractors who work on federal projects, and applies to new contracts.
It would give some workers as much as a 39 percent raise. But others would lose jobs, since Congress is unlikely to increase contractors' funding because Obama has raised the minimum wage by executive order, skirting congressional authority.
In a fact sheet, the White House stated, “Low wages are also bad for business, as paying low wages lowers employee morale, encourages low productivity, and leads to frequent employee turnover--all of which impose costs."
Although he has little private-sector experience, the president thinks he knows best how to run a business.
Some unintended consequences: Under the new order, food service contractors operating federal cafeterias might lay off workers to keep costs even. Or, if firms kept all workers, they might cut costs in other ways, or raise prices of food.
The order is more show than substance. If Obama cared about the issue, he could have ordered all employees of federal contractors—not just those working on federal contracts—to be paid $10.10 an hour immediately, indexed for inflation. President Lyndon Johnson’s 1965 Executive Order 11246, which banned government contractors from discrimination on the basis of race, sex, and national origin, covered all employees of federal contractors.
Large government contractors, such as Lockheed Martin and Boeing, primarily employ professionals such as mechanics, engineers, scientists and professional service personnel who are already paid more than $10.10.
The left-wing non-profit organization Demos has estimated that federal contractors employ 560,000 people making less than $12.00 an hour on government contracts. If 250,000 employees of government contractors made less than $10.10 an hour — say, an average of $8.10 — and each worked 2,000 hours per year, then when the minimum wage increase were fully phased in, each employee would cost the federal contractor another $4,000 annually. The cost to the federal contractors to raise wages for those 250,000 workers would be $1 billion a year.
While legal, the minimum wage executive order is contrary to congressional intent and contrary to the practices of American people. The president is out of step with Congress, and out of step with the country.
Most people do not hesitate to go to fast-food establishments because these restaurants pay minimum wage. On the contrary, fast-food restaurants appear to be flooded with customers.
The House of Representatives has shown wisdom in keeping the minimum wage at $7.25 and allowing states to set higher minimum levels if they choose.
Fewer than 3 percent of American workers make minimum wage, but half of them are younger than 25. Teens faced a 20 percent unemployment rate in December. The unemployment rate for African American teens was higher, at 36 percent. These are the people who would be adversely affected by a higher minimum wage.
Census data assembled by Heritage Foundation economist James Sherk show that the average annual income of a family with a minimum wage worker is $53,000. Minimum wage workers tend not to be heads of households.
Obama's order will discourage federal contractors from hiring young, low-skilled workers. Precisely to avoid giving employers disincentives to hire such individuals, our society has crafted a social safety net to supplement low earnings, including the earned income tax credit, energy assistance, food stamps, Medicaid, and housing vouchers.
To raise earnings, we should encourage children to finish high school. Along with unemployed adults, they should get post-secondary education in high-return fields, such as health services or computer programming. Then employers would be competing to hire them at wages far above Obama's proposed minimum.
Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow and director of Economics21 at the Manhattan Institute for Policy Research. You can follow her on Twitter here.