SBA: Contractor Wage Hikes Will Force Layoffs

Business owners say Obama executive order leaves them few options

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Small business owners affected by President Barack Obama’s executive order raising the minimum wage for federal contractors say that it will lead to layoffs, according to a federal agency.

A summer newsletter prepared by the Small Business Administration’s Office of Advocacy described the daunting prospects that small business owners face under the wage hike. Contractors who participated at a July 9 panel conducted by the SBA said the new rules were “confusing” and “extremely financially burdensome.”

“They related that they would not only have to pay an increased minimum wage for entry-level workers, they would have to also increase the wages of the rest of their workforce as well,” the report says.

Higher wages will hurt more than just small business owners, according to the report. The additional labor costs could end up leaving many contracted workers unemployed.

“This would cause a severe financial impact on their businesses and force them to fire workers, eliminate positions and reduce hours. One restaurant owner said based on his calculations, the wage increase would certainly put him out of business,” the report states.

Many contractors do not have the ability to raise prices, limiting their flexibility to react to the changes. Layoffs become the only way to offset the cost, according to the report.

“(Business owners) also said that it would also place them at a competitive disadvantage with similar businesses located just outside the bases, which would not have to pay these higher wages. And, these franchisees noted that their contracts do not allow them to raise their prices. Owners of a hotel and dining facilities on military bases echoed these concerns,” it says.

Obama has campaigned for a 40 percent hike to the minimum wage for more than a year. After failing to gain traction in congress, Obama signed an executive order the month after his January State of the Union address that forced government contractors to pay a $10.10 minimum wage starting January 2015. That included small businesses, such as chain restaurants, that employ entry-level unskilled workers.

“As a chief executive, I intend to lead by example. Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover. We should too.  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,” Obama said in the State of the Union.

The executive order could impact about 300,000 small federal contractors, according to the Department of Labor, putting thousands of jobs at risk. Other government agencies have noted the potential costs of implementing a national $10.10 hourly wage. The nonpartisan Congressional Budget Office estimated that Obama’s proposal could eliminate up to 1 million jobs, as employers seek leaner operations and increased reliance on technology to drive up productivity.

Michael Saltsman, research director at the Employment Policies Institute, said the experience of the contractors could provide a preview of future economic hardship if Obama successfully passes a national wage hike.

“The message from the White House and Labor Secretary Tom Perez is that a $10.10 minimum wage for federal contractors will provide a ‘boost’ for employees. This newsletter from the president’s appointee at the SBA’s Office of Advocacy shows what a fiction that is,” he said. “Before doing any more damage, perhaps the president and his staff should get additional feedback from their appointee at the SBA.”