Next week, federal contractors will begin paying workers at least $15 an hour. Pay will rise for up to 390,000 federal contractors, about half of whom are Black or Hispanic (see Table 1). The new rule from the U.S. Department of Labor will also phase out the subminimum wage for tipped workers on federal contracts and continue to increase the federal contract minimum wage in line with inflation.
The new minimum wage standard will also improve the efficiency of the federal contracting system by reducing worker turnover and increasing the productivity of the workforce. Since workers value their jobs more after a minimum wage increase, they are increasingly likely to stay at their current jobs and be more productive at work, as a recent study of a large U.S. retail firm illustrated. As another example, research shows that increased employee retention after minimum wage increases has led to productivity improvements at nursing homes, with fewer inspection violations and lower resident mortality.
In addition to increasing the incomes of hundreds of thousands of federal contractors, the new minimum wage standard will also help to raise wages throughout the rest of the labor market. Higher contractor wages will incentivize other firms in the local labor market to raise wages in order to recruit and retain workers who can now earn higher pay. Amazon’s $15 starting wage, for example, increased pay in other low-wage occupations. And as firms complete their contracts and leave the federal contracting system, they are more likely to keep pay levels above the new, higher minimum wage standard. For instance, Conrad Miller showed that federal affirmative action requirements increased the Black share of employees at firms with contracts, even after they were no longer federal contractors.
Although the new federal contracting minimum wage will have broadly shared benefits, it is no substitute for an economywide federal $15 minimum wage. It has been over a dozen years since the last federal minimum wage increase: Congress should do its job and raise the minimum wage.