How Will Obama’s Wage Crusade Affect American Jobs?

Money

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President Barack Obama is serious about raising the wages of lower-income Americans — so serious that he’s willing to attract the ire of many Republicans and business owners by bypassing Congress in order to change the federal laws surrounding wage policies in the United States. He said as much in his 2014 State of the Union Address, issuing the first of what appear to be many ultimatums on the issue of fair working wages in America.

“I intend to lead by example,” said the president. “In the coming weeks, I will issue an Executive Order requiring federal contractors to pay their federally-funded employees a fair wage of at least $10.10 an hour.” He encouraged state government and legislators to do the same, arguing that the people are on their side, and that waiting for this Congress to get its act together would be a waste of time.

The day after his State of the Union, President Obama made good on his promise and signed the executive order raising the minimum wage for federal contractors. The move attracted no shortage of ire from opponents, but the president was unfazed.

On March 12, President Obama made another executive decision. “Today, I’m going to use my pen to give more Americans the chance to earn the overtime pay that they deserve,” said the president in his statement on the matter. “If you go above and beyond to help your employer and your economy succeed, then you should share a little bit in that success.”

Those affected by the measure will include workers in many managerial and quasi-managerial positions such as fast food managers, loan officers, and computer technicians that fall under the broad umbrella of executive or professional employees. These employees can often end up working more than 40 hours per week, but their labor can go unrecognized from a wage perspective because they are salaried.

Workers who earn at least $455 per week are exempt from overtime pay rules, so employers don’t have to pay them more if they work more than 40 hours per week. Since these workers can be put on salaries as low as $24,00 per year they can end up earning a real wage that works out to less than the current federal minimum of $7.25 per hour. Adjusted for inflation, the $455 per week exemption limit would be $533. This is consistent with a general depreciation in the real value of the minimum wage itself.

“Today, the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” said President Obama in his 2014 State of the Union Address. The president supports a proposal championed by Senator Tom Harkin (D-Iowa) and Representative George Miller (D-Calif.) that would raise the federal minimum wage to $10.10 per hour.

The idea behind the minimum wage increase is this: Purchasing power is all important, particularly at the lower end of the wage spectrum, where non-discretionary expenses (life necessities, the cost of living) consume a high share of income. If lower-income workers make more money, they will spend more money, and spending is the steam that turns the pistons of the economic machine.

As far as the will of the people is concerned, the data support President Obama’s claim. According to a Bloomberg national poll, 69 percent of Americans favor raising the minimum wage to $10.10 per hour. However, when the Congressional Budget Office examined the possible economic impact of the proposal to raise the minimum wage to this level, it came to some mixed conclusions.

“Increasing the minimum wage would have two principal effects on low-wage workers,” the CBO wrote. “Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.”

Along with the $10.10 option, the CBO examined a $9 option. Here’s a breakdown of what the effect on employment could be. Note that each central estimate is contextualized with a likely range, reflecting inherent uncertainty about what would actually happen if the minimum wage were increased at the federal level. Along with these employment estimates, the CBO calculated that overall real income would increase by $2 billion across all workers, positively impacting as many as 16.5 million people and moving about 900,000 people out of poverty.

Source: Congressional Budget Office

Source: Congressional Budget Office

When asked whether the trade off estimated by the CBO was worth it, most respondents (57 percent) in the Bloomberg national poll said no.

A separate survey of U.S. chief financial officers conducted by Duke University’s Fuqua School of Business also revealed a lot of friction to the idea of a wage increase. Nearly half of CFOs at retail firms said an increase in the minimum wage to $10 would reduce jobs, while about one-third of CFOs in services and manufacturing said it would reduce jobs.

“While a hike in the minimum wage would help low-wage workers who retain their jobs, the unintended negative consequence of job loss would be borne by this same group of workers,” said John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey. “There is hope for compromise, however. Some firms in these industries already pay above minimum wage and others indicate that a modest hike in the federal minimum wage would cause only modest job loss.”

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