In his State of the Union address Tuesday night, President Obama is planning to raise the minimum wage for federal contract workers from $7.25 per hour to $10.10 per hour. Here's how this all works:
What would Obama actually do? President Obama would issue an executive order giving preference in awarding federal contracts to companies that pay their workers at least $10.10 per hour. The rules would only affect new contracts signed in 2015 or later (and not companies on existing contracts).
This is a move that progressive lawmakers like Sen. Bernie Sanders (I-Vt.) have been pushing for a while.
Who would get a raise? By some estimates, around 200,000 people — though this would only happen gradually, over time, as new federal contracts get awarded. That's about 10 percent of the federal contracting workforce. So it's a change at the margins.
More background: There are currently about 560,000 employees of federal contractors who make less than $12 per hour, according to a study last year by Demos. A smaller subset of those would potentially be affected by the new rules.
But as the order takes effect and new contracts get awarded, raises could trickle out to a wide variety of workers. The National Employment Law Project recently interviewed 500 federal contract employees who serve food, sew military uniforms, and drive trucks, and found that more than 70 percent of them made less than $10 an hour.
Won't this increase government spending? It could at the margins. There are a couple ways this rule could play out. Companies competing for federal contracts in the future could pay their low-wage workers more and end up getting more money from the federal government to compensate. Or they could respond by cutting costs elsewhere. Or they could respond by employing fewer low-wage workers in the first place. (In the rest of the economy, firms often respond to minimum-wage increases by doing a mix of the latter two.)
Here's one way to think about how this rule could federal spending: A 2008 study (pdf) by researchers at Suffolk University looked at the law requiring the government to pay competitive wages on federal construction projects. Those rules, they found, raised the cost of those projects by about 10 percent. (That's not a direct estimate for this latest rule, just an example.)
Could the administration go even further than this rule? In theory, yes. He could apply the rule to all existing contractors, for one.
Or, alternatively, there are workers who are indirectly paid by the federal government. The Demos study found that there were nearly 1.4 million workers making less than $12 per hour who were financed in indirect ways by the federal government. For instance: The 1.2 million home health aides and other health-care workers financed by Medicare or Medicaid. Or the 200,000 workers at companies financed by Small Business Administration loans:
It's mainly the 560,000 workers funded directly by federal contracts would be affected by Obama's new order. But as my colleague Lydia Depillis noted here, it would be possible to boost the pay of some of these other workers through executive action.
What about the minimum wage for everyone else? Only Congress the states can change that. In his State of the Union address tonight, Obama is planning to urge Congress to pass a bill sponsored by Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.) that would raise the federal minimum wage for all workers from $7.25 per hour to $10.10 per hour and index it to inflation. That would affect some 5 million Americans. But that's a decision for the legislature.
Further reading: Economists disagree on whether the minimum wage kills jobs. Why?