Back in late April, President Biden signed an executive order raising the minimum wage for workers on federal contracts to $15 an hour starting in the beginning of 2022. While this ostensibly only applies to federal workers, in practice it is likely to function as a backdoor way to raise the minimum wage nationwide without Congressional action.
The new minimum wage set to come into effect is targeted at federal contractors, but it will also impact private companies that hold permits to operate on federal lands, such as concessionaires and outfitters in national parks. All told, the Department of Labor estimates that 507,200 businesseswill be subjected to the mandated minimum wage increase.
But this estimate does not attempt to account for spillover effects. Private employers not subject to the minimum wage increase, but competing with businesses that are, will face pressure to raise wages to prevent employees from leaving for competitors with artificially inflated wage scales. This can even be true for businesses that are not in the same industries as federal contractors, as minimum-wage workers can often shift industries more easily than higher-wage workers.
Now, for proponents of minimum wage increases, this is surely more of a feature than a bug. Biden himself has made no secret of the fact that hewants a $15 an hour national minimum wage, and it should come as no surprise that the administration is not concerned that a minimum wage increase for federal contractors would affect the economy at large.
But a minimum wage increase, albeit a backdoor one, comes at a precarious moment for our nation’s economic health. The primary issue with minimum wage increases is that they have the potential to increase labor costs to the point where businesses are forced to cut jobs. With inflation hitting a decades-high rate of 6.8 percent, this would hit employers that are already facing rising costs for everything else.
The Congressional Budget Office (CBO), Congress’s nonpartisan budgetary scorekeeper, recently modeled the impact of a national minimum wage increase to $15 an hour (phased in through 2025). The CBO found that while many workers would receive wage increases, businesses’ labor costs would increase by $333 billion, resulting in 1.4 million fewer jobs.
The truth is that the federal minimum wage is a blunt tool for raising wages. It cannot account for differences in businesses’ labor costs, employees’ cost of living, and other factors that are generally priced into wages set by the market. Some localities, high-cost urban areas in particular, can bear the impact of a $15 minimum wage far better than rural ones. That’s why the federal government has largely left minimum wage increases to states and localities. In fact, some 31 states have instituted minimum wages higher than the federal standard.
Centrist think-tank Third Way has suggested a hybrid approach that would allow minimum wages to be set at the national level but still account for regional differences. The Regional Minimum Wage would assign a minimum wage tier to different areas based on the cost of living in that area, ranging from $9.80 an hour in the lowest-cost areas to $13.30 in the highest-cost areas. While the wage levels could be up for debate, the idea of setting minimum wages based on regional cost of living has far more merit than a ham-fisted one-size-fits-all approach.
Biden’s minimum wage executive order is not receiving much attention with all the focus on reconciliation bills and debt-limit increases, but it will function as a way to pressure businesses all across the country to abide by a higher minimum wage, without Congress needing to pass any legislation. Rather than letting minimum wage policy be driven by out-of-touch urban beltway-dwellers, the administration should rethink the impact this will have on a national level.
