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Minimum wage hikes will dent Pentagon budget

The cost of raising wages to at least $15 an hour for civilians and contractors could approach $900 million

Commuters at the Pentagon City Metro station in 2015.
Commuters at the Pentagon City Metro station in 2015. (Brittany Greeson/The Washington Post via Getty Images file photo)

New federal rules issued by President Joe Biden requiring that federal employees and government contractors must earn at least $15 an hour could cost the Defense Department $880 million a year, according to estimates from the Pentagon and congressional budget experts.

To be sure, the cost to the federal government, or just the Pentagon, of the higher minimum wage was not central to the arguments for or against it. Some business leaders and conservatives argued against it, mainly on the grounds that it would cause employment losses. Supporters of the raises clearly believe the boost to working families makes the additional cost worth it. 

And even $880 million in extra annual expenses at the Pentagon represents but a tiny fraction of the department’s yearly budget of nearly three-quarters of a trillion dollars.

However, $880 million is not an insignificant figure and, even in the Defense Department, it is an amount that budget writers will have to reckon with. 

“The problem with unfunded mandates like a minimum wage is that they eat away at purchasing power,” said Mark Cancian, a former Office of Management and Budget official who is now an analyst with the Center for Strategic and International Studies. “That’s not a major problem if the budget is rising. Because the Biden administration’s defense budget is likely to be level at best, this widens an already existing gap between the administration’s defense strategy and the resources available.”

Public and private wages

A mandate that contractor employees working under new deals or extensions must make at least $15 an hour went into force late last year, and the same minimum wage for federal employees took effect in January.  

The vast majority of the federal workers affected by the rule governing their wages, 56,000 people, work for the Defense Department — at commissaries, day care centers, food service facilities and performing sundry other forms of labor.

Christopher Sherwood, a Pentagon spokesman, said the mandate for federal employees is expected to cost the Defense Department about $250 million a year. 

The federal contractor wage hike, meanwhile, appears likely to become even more expensive, though how much is not yet clear.

Sherwood did not have an estimate for that requirement’s cost, which companies are expected to largely pass on to taxpayers. 

“While the DoD has a reasonable understanding of the total labor category count for those federal contractors making less than $15 per hour, it is unclear how vendors will account for these added operating costs,” Sherwood said.

However, the Congressional Budget Office estimated the cost of a similar mandate in the House’s fiscal 2022 National Defense Authorization Act — a provision that was dropped in the final version of the bill.

The CBO pegged the House bill’s $15 minimum wage requirement for private sector defense contractors at $630 million a year, although CBO caveated its estimate as significantly uncertain because it is not clear to what degree contractors would pass on their costs. 

‘Transformative’ move

Supporters of the new wage requirements, including federal workers’ unions, view the cost of the higher federal employee minimum wage as relatively minor in the scheme of the Pentagon’s sizable budget, and they believe the benefits justify the cost. 

“For the tens of thousands of workers who will start seeing more money in their paychecks each week, this is a transformative policy choice that will improve their everyday lives,” said Everett Kelley, president of the American Federation of Government Employees, the largest federal workers’ union, in a statement last month. “And because 85 percent of federal workers live outside the DC area, it is hard to imagine a single action that could have a more significant positive impact on all American workers’ paychecks beyond raising the federal minimum wage itself, which would take an act of Congress.”

The benefits, Kelley and others say, include higher productivity and morale and a greater ability to recruit and retain workers in a competitive labor market. 

“As the largest employer in the country, how the federal government treats its workforce has real impact, and raising pay rates across the federal government to a minimum of $15 per hour reflects our appreciation for the federal workforce and our values as a nation,” Sherwood said in a statement. 

It is, he added, “another way that we can serve as a model employer, setting a high bar for other sectors to follow.”

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