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About that pen…

January 28, 2014

Apparently seeking to make good on his observation that he will go around Congress via executive order, the President is signing an order today requiring all businesses contracting in the future with the Federal government to pay a minimum wage of $10.10 an hour, according to a New York Times article today.

What does that really mean?  It depends on what side of the equation you’re on. If you fit the profile of the janitors, laborers, clerks or call center workers employed by one of these private contractors, it means you may get a raise, sometimes a pretty good one. Many of those low wage jobs pay roughly eight or nine dollars an hour now, although there are few that probably that do pay close to the current  minimum wage of $7.25/hr. Notice the italics above. This does not mean that if you are working now, your next weekly paycheck is going to be forty or eighty dollars higher. In fact, if your employer has a current contract, and there are no other substantial changes in it, they do not have to raise your wages. Only when they re-bid the contract will they have to factor in the wage increase.

If the Demos report quoted in the NYT article cited above is correct, reporting  that 560,000 wage earners working for Federal contractors are making under $12.00 an hour, and assuming that every single one of those people also makes less than $10.10 an hour (a bit of a stretch) this wage increase would affect  about .004 percent of the population. That 4/10 of one percent of all the people reported by the feds as employed in December 2013. If you are one of those 560,000 you are probably cheering. The rest of us, not so much.

Bidding Federal contracts successfully without going broke is difficult. Cost projections have to be made over the life of the contract, and those cost projections have to allow the contractor to make some profit beyond their costs. It is unlikely that current contracts can support raising the wages during the contract period unless they can recoup that cost from the feds.

What it really means is that everything the government now buys that requires an input category for labor in the bid will go up. If the bulk of the business expense is for labor and labor-related benefits and taxes, it could go up a lot. What happens if you just look at the effect of the  actual wage increase, without considering any benefits or additional wage-based costs like unemployment insurance costs or workman’s compensation premiums?

The real dollars and cents result

Assuming that you have 50 employees making an average $8.50 an hour and  working forty hours a week, that increase will add a minimum of $1.72 to the cost per hour, if you factor in the automatic tax obligation increase of 7.53% of wages for FICA ($1.60 an hour increase plus 7.53% of that figure for the employers share of FICA). Fifty employees working 40 hours a week equals 104,000 man hours paid per year. That $1.72 will raise the employer’s direct cost a minimum of $178,880 dollars a year. That’s not chump change, and it will definitely factor in to the next contract the employer bids on.

Where does the money come from to pay Federally funded  employees?  From tax dollars, your tax dollars. Some of that will come out of the wages of the person getting $10.10 an hour. Using 2013 tax withholding tables, a married worker with one child, currently earning $8.50 an hour and claiming three exemptions would pay approximately $11.15 more in withholding and increased FICA per week, or about .28 cents per hour when the wage increase goes into effect. 104,000 hours would result in a tax payment increase to the Federal treasury of about $29,120 for those fifty employees. So, out of the increased costs added to the bid, the workers themselves will pay about 17% of the cost. The remaining 83% of the costs, or $148,470, has to come from someone else. And the neat political fact of this increase is that it’s full effect won’t be immediately apparent to anyone, including those 50 or 560,000 workers.

Trickle down taxes?

Given that there seems to be a Federal tax cost on just about everything at one stage or another of its life, that’s a lot of tax increases. Even this president knows we can’t get all of that from workers making more than $10.10 an hour, and the millionaires and billionaires can only absorb so much of that cost. The rest of it is going to come from sneaky taxes, like gas taxes, production taxes,  and increased fees on both businesses and individuals.

The heck of it is, when you are talking about money collected by the IRS, you have no choice but to pay it. If McDonalds raises the price for a hamburger, you can just refuse to buy it. If the government says you owe more taxes you can’t exactly tell them to take a flying leap.

If this administration is doing nothing else, it is giving the country a great lesson in what happens when the government takes over a country by executive fiat. Hopefully we aren’t slow learners.

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2 Comments
  1. Bee bee permalink

    Guess who said this? “The biggest problems that we’re facing right now have to do with George Bush trying to bring more and more power into the executive branch and not go through Congress at all. And that’s what I intend to reverse when I’m president of the United States of America.” Senator Barack Obama, March 31, 2008 Short memory, I guess.

    • True, he did say that. The problem is that the Constitution was written when people believed that presidents would always govern for the good of the country, not for their own political self-preservation.That’s why codifying the scope of that power needs to be a priority.

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