Tonight’s State of the Union speech will feature in large part a threat by Barack Obama to go it alone on policy, as he’s unable or unwilling to negotiate with a Republican-controlled House. Obama will make good on his threat at least once, in forcing federal contractors to pay a 39% increase in the minimum wage across the board for all new contracts:

President Obama plans use his executive authority to raise the minimum wage to $10.10 per hour for federal contract workers, according to multiple reports.

He will outline the proposal in his State of the Union Address on Tuesday night.

The White House highlighted janitors and construction workers on federal sites as some of those who would be helped by the executive order. The administration also mentioned workers on military bases.


“Hardworking Americans — including janitors and construction workers — working on new federal contracts will benefit from the Executive Order,” the White House said in a statement, according to reports.

This raise amounts to a 39% increase from the current $7.25. The last time the minimum wage was increased was 2009, so that’s about 7% a year — a very far cry from the wage growth overall during that period. Here is the data charted out by the BLS on private-sector compensation growth, unadjusted, over the same period:

bls-wage-growthThe large increase will mean higher costs for taxpayers in a couple of ways. The way the White House crafted the EO (or at least their statement), federal contractors will have to pay $10.10 as the minimum wage for all workers if they agree to any new contracts for the federal government. That means that their labor costs will escalate rather dramatically, especially since that new minimum will have to get scaled into workers earning above the current minimum. Raising the floor in a workplace means raising a few levels above it, too. Increased labor costs will force companies to bid higher rates on federal contracts. We will be paying more for the same services and products we currently buy as taxpayers — a lot more.

This will shrink the pool of contractors, too, which will also mean less competition and higher prices for taxpayers.  Large companies that can split off their federal contract work into subsidiaries will presumably be able to avoid applying the new minimum wage to other business units. Smaller contractors probably won’t be able to manage that, and that will make them less competitive. And some companies will simply choose not to pursue federal contracts at all, leaving the government with fewer options, and less flexibility.

Furthermore, because these companies will not be able to recoup all of the costs of labor through price increases, they will have to find ways to increase efficiency. That means fewer jobs will get created, and some will get lost — as happens every time the minimum wage gets hiked in any significant way.

Can Obama do this? On new contracts, sure. But it’s going to end up being a disaster, the way most of his unilateral moves have been. Taxpayers will pay a high price for Obama’s mostly-impotent muscle-flexing.

Update: Of course, the question here is just how many federal contractors actually pay a minimum wage to workers — and how many workers that impacts. It will impact hourly workers probably no matter what, especially for those who hire in at less than the new minimum. In my last job as a hiring manager, our floor was above that level (and we weren’t federal contractors anyway), so a minimum wage hike would have no direct impact, although it might have had some indirect impact in the competitive marketplace. At that time, though, the civilian workforce participation rate was near its all-time high and the unemployment level in Minnesota was in the 3% range.

I’d guess that some federal contractors still have workers in that range, and hourly workers in the range just above it. If not, then this is meaningless anyway. I suspect that the White House is counting on it being a non-sequitur in the marketplace.

Update: A question from the comments: “Where’s his budget authority to do this?” Congress authorizes spending levels, not contract terms. The executive branch negotiates contracts within their authorized spending levels. So yes, a President can issue this kind of EO, but it doesn’t give him any more money to spend, so when prices go up …. things won’t get done until Congress authorizes more money.