Americans are coming to face the hard reality that they live in a new Gilded Age, with inequality at levels not seen since before the Great Depression. Even worse: Uncle Sam is subsidizing this lopsided economy.
The federal government is, indirectly, the largest low-wage employer in the country. While it has relatively few of the working poor on its payroll, the government hires thousands of private contractors that pay poverty wages to their workers, and hundreds of thousands of dollars to their executives.
A coalition of progressive groups are urging the Obama administration to issue an executive order requiring contractors to pay their workers a living wage — defined as the minimum required to meet one’s basic needs.
According to a new study by the think tank Demos, this could be achieved without increasing taxes by flattening the wage structure of federal contractors. As the report’s authors, Robert Hiltonsmith and Amy Traub explain:
The federal government spends an estimated $23.9 billion a year paying private contractors for the compensation of top executives. If taxpayer-funded payouts for these executives were capped at $230,700 — the salary of the US vice president — the pay of hundreds of thousands of low-wage federal contract workers could be raised by as much as $6.69 per hour or $13,902 per year for a full-time worker, without costing taxpayers an additional dime.
Current law dictates that the federal government must reimburse or price into contracts up to $763,039 in compensation for any one employee — an amount pegged to the salaries of the most highly-paid private sector executives. This maximum, which has risen by 48 percent (adjusted for inflation) since 2004, is set to rise to more than $950,000 later this year if no action is taken to change the formula.
Here we consider the savings if the cap were lowered to the amount of the US vice president’s salary, $230,700 per year, which matches the proposal in the bipartisan Commonsense Contractor Compensation Act of 2013. This amount also represents the maximum that most civilian employees directly employed by the federal government can make in a given year. Firms with federal contracts could continue to pay their executives amounts far exceeding this cap, but taxpayers would no longer reimburse or price these costs into contracts with the affected companies for any amount in excess of $230,700. We estimate that by lowering the cap for all contracting firms to $230,700 annually, the government would save $6.97 to $7.65 billion per year.
To address the problem of poverty-wage jobs on federal contracts, we then calculate the raise that could be given to lower-paid contract employees with these savings. We find that if the savings from a lower public recognition of executive pay were hypothetically used to give a raise to low-paid contract employees — the 560,000 contractors who earn $12 per hour or less — it could pay for a raise of $13,902 per year, or $6.68 per hour assuming a full-time workload. If we instead used the savings to give raises to all 2.15 million contractors who earn less than $230,700, we could give them each a raise of $3,624 per year, or $1.74 per hour. Cutting the taxpayer subsidy of millionaires’ salaries while raising the wages of ordinary workers would not only be efficient, but would set an example of fairer compensation.