2021-01-22

3-D Chess And The Federal Minimum Wage

MSN.com reports that President Joe Biden is signing an executive order to set the wage minimum paid to federal employees and contractors at $15 per hour.

Note that this is not actually "an increase in the federal minimum wage." Biden's executive order is about the wage that the federal government pays to its own employees. It is not an executive order about setting a national minimum wage. If I'm not mistaken, the latter requires Congress and could never be achieved by an executive order. 

Biden has always been popular among federal employee unions, school unions, and the like, because he has always been quite favorable to their policy preferences in the past. So it will not be surprising if we hear members of these unions reacting quite happily to Biden's executive order on federal wages. That's a political win for Biden.

Interestingly enough, though, it might also be an example of 3-D chess. Why? Because increases in the minimum wage are well-understood to decrease employment. When you make something more expensive - in this case, labor costs - you get less of that something - in this case, labor. This is one of the most empirically robust findings in economics. It's not even worth debating anymore. Increases in the minimum wage decrease employment. 

Thanks to both the covid-19 pandemic and the various government lockdowns attendant thereto, the economy is in quite a pickle. The federal government is spending money like a drunken sailor, money it doesn't actually have. So the government's debt is increasing, and its budget deficit is increasing, and the US economy is not very healthy. One solution proposed by those who favor "austerity measures" is a reduction in federal spending. 

So the question is, how would a Democrat who wants to make unions happy choose to reduce federal spending while still pleasing his union supporters? One way might be to raise the wage standard such that the federal government hires fewer employees, reducing costs. Of course, this can only happen if the workforce reduction (or its growth rate) is reduced by more than the cost of the wage increase. Well, the federal government is now free to reduce the size of its workforce as much as it wants, since the unions are happy and US citizens in general have received the signal that Biden is "good for labor."

It will be interesting to watch and see what happens to the size of the federal workforce.

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