FEBRUARY 14, 2014
Photo Credit: [President Obama prepares to sign an executive order to raise the minimum wage for federal contractors to $10.10. (Shawn Thew / European Pressphoto Agency)http://www.latimes.com/nation/politics/politicsnow/la-pn-obama-minimum-wage-20140212,0,4710539.story#ixzz2tJUkLukP]
Following through on his State of the Union Address rhetoric, President Obama signed an executive order Wednesday to raise minimum wage for future federal contractor employees.
The executive order states that minimum wage for Federal contractors and subcontractors will be $10.10 per hour and $4.90 per hour for tipped workers. Both increases begin January 1, 2015. While Obama is optimistic that the increase will benefit workers, economists have reservations due to research linking minimum wage increases with unemployment.
“Raising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs. These savings and quality improvements will lead to improved economy and efficiency in Government procurement,” Obama states in the order.
Economic research shows there is a downside to a higher minimum wage, however.
“There is no ‘free’ lunch when the government mandates a minimum wage,” said Mark Wilson, former deputy assistant secretary of the U.S. Department of Labor and current head of Applied Economic Strategies, LLC. Wilson said once a minimum wage is imposed businesses have to make adjustments to compensate for paying workers extra money. Reducing hiring is one such adjustment, Wilson said in his 2012 policy analysis entitled, "The Negative Effects of Minimum Wage.”
In the analysis, Wilson used a competitive market model to demonstrate the effect of a minimum wage. In this model, price p* is the equilibrium price which, in this case, represents the wage offered by employers. At price p* the number of people searching for work, the supply of workers, equals the number of workers businesses desire, the demand for workers. There is no unemployment at this price.
However, if a minimum wage is set at price p2, more workers are willing to work for this wage than businesses are willing to hire. Qs, quantity supplied, represents the workers willing to work while Qd, quantity demanded, represents the number of workers the business is willing to hire at the higher wage. The disparity between quantity supplied and quantity demanded results in an excess supply of workers, aka unemployment.
“[T]he unemployment rate remains high […and] raising the minimum wage can only make […] matters worse,” said J.D. Foster, deputy chief economist at the U.S. Chamber of Commerce in an article he wrote, “A Better Approach Than the Minimum Wage Distraction.”
Obama no doubt heard these arguments ringing in the background of his mind as he signed the order.
“It’s not going to depress the economy, it’ll boost the economy,” Obama was quoted as saying by a recent Reuters’ article. Such a refute to economists seems insufficient but time will tell if the order is beneficial or not.
Articles Referenced/Further Reading:
http://www.whitehouse.gov/the-press-office/2014/02/12/executive-order-minimum-wage-contractors
(Obama’s executive order)
http://www.cato.org/sites/cato.org/files/pubs/pdf/PA701.pdf (Mark Wilson’s policy analysis)
https://www.uschamber.com/blog/better-approach-minimum-wage-distraction (J.D. Foster article)
http://www.reuters.com/article/2014/02/12/us-usa-obama-wages-idUSBREA1B0PZ20140212
(Reuters article)
http://blogs.wsj.com/economics/2014/01/30/should-the-minimum-wage-be-raised-economists-weigh-in/
