Is Obama's Minimum-Wage Hike Just a Lot of Hot Air?

The president's pledge to increase contractor pay won't cover very many workers, but it's a small step in the right direction.

Feb 2, 2014 at 10:11AM

As was widely expected, President Obama made income inequality a focal point of his 2014 State of the Union address. While recognizing the limits of his own power in dealing with this economic issue while Congress remains intransigent, Obama nevertheless pledged to "take steps without legislation to expand opportunity for more American families." One such step promised during the address was an executive order to raise the minimum wage to $10.10 for federal contract workers.

Labor activists and liberal politicians have long championed a rise in the federal minimum wage, and the American public is firmly behind the effort, as roughly three-quarters of Americans have voiced their support for a minimum-wage hike. But while this executive order is a step in the right direction, it's important to also consider just how limited -- and thus, largely ineffective -- it actually is.

Let's first consider the number of people who actually make minimum wage, or less than minimum wage, who might be helped by legislation to raise it:

Minwagepie
Source: U.S. Bureau of Labor Statistics.

Between those earning the minimum wage and those earning less than minimum wage -- a number of jobs are exempt from minimum-wage laws, including full-time or vocational students working in several industries and the disabled (if the disability prevents full capabilities at the job) -- 3.6 million Americans might conceivably be helped by new minimum-wage laws.

Obama's executive order doesn't actually affect these people, unless they happen to work for federal contractors. There were roughly 2 million federal contract workers when the Economic Policy Institute examined the government's numbers in 2009. Of these, an estimated 560,000 were paid $12 an hour or less. Roughly one in five federal contract workers earned less than poverty-level wages, which in 2014 works out to be $11,670 for an individual and $23,850 for a family of four. By comparison, working full time at the present $7.35 minimum wage, with no time off at all, would earn one person $15,080. If you had to support anyone other than yourself, you'd be under the poverty line.

While a number of federal contractors might benefit from raising the minimum wage, most won't. Let's update our graph to reflect this new reality, under the assumption that roughly 80% of low-wage federal contract employees might benefit from Obama's executive order:

Minwagecontractors
Sources: U.S. Bureau of Labor Statistics, Economic Policy Institute, Bloomberg.

The slice that might benefit isn't the second blue slice representing 1.6 million above-poverty federal contractors; it's the tiny dark blue slice, barely visible, wedged between that 1.6 million and the nearly 139 million workers that make up the rest of the American economy. In percentage terms, below-poverty federal contractors make up a third of a percent of the entire American labor force.

But wait! It gets worse! The executive order won't cover existing federal contract workers, but will apply only to those hired beginning in 2015. Since Obama took office, annual federal contract spending has actually declined, from $540 billion in 2009 to $460 billion in 2013. While that might hearten small-government advocates, it also means that fewer contract employees are likely to be hired in the future, barring a major reversal of the trend, which is bound to further reduce the impact of the wage hike. Nor will the executive order cover disabled workers, who have been a glaring exemption from the Fair Labor Standards Act. Roughly 420,000 disabled Americans are employed by programs coordinated through all levels of government, but it's unknown how many would be affected by the executive order.

However, enacting an across-the-board minimum-wage increase through Congressional legislation would have an enormous impact on the American workforce. Last year, the Economic Policy Institute undertook a study on raising the federal minimum wage to $10.10 an hour and found two things of particular importance. First, a $10.10 minimum wage would be the highest real (adjusted for inflation) minimum wage in almost 50 years -- at an effective annualized rate of $19,800, this new rate would be higher than the all-time real annualized high of $19,600 set in 1968. And second, by the time the minimum wage rises to $10.10 an hour, 16.7 million workers would receive more pay and another 11.1 million workers would indirectly benefit from the pay raise of their fellow Americans:

Images
Sources: U.S. Bureau of Labor Statistics and Economic Policy Institute.
Note: Data assumes no change in labor force or unemployment (an unrealistic assumption).

While Obama's executive order may not help any government contractors today, and while it's not likely to help many in the future, it does begin an important conversation with the American public over the value of a higher minimum wage. If that conversation leads to legislation, it might turn out to be a valuable act after all.

Don't settle for the bare minimum when it comes to your financial future
You don't need to be making millions to start planning for a comfortable retirement. Even minimum-wage workers can benefit from a better understanding of the stock market, which is a proven way to grow your nest egg over the long term. The key is to learn how to turn business insights into portfolio gold by taking your first steps as an investor. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you what you need to get started, and even gives you access to some stocks to buy first. Click here to get your copy today -- it's absolutely free.

Add Alex Planes on Google+, or follow him on Twitter, @TMFBiggles, for more insight into markets, history, and technology.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers