Fort Madison Daily Democrat, IA
02-06-07
The dawning of a new wage
ISU Professor: Minimum wage hike is unnecessary
Chris Faulkner/Staff Writer
Not only does Peter Orazem think the recent increase in the minimum wage
won't have the positive effect for Iowa's residents that is claimed, when you get
right down to it, Orazem doesn't even think a minimum wage is necessary.
That may not be a politically expedient point of view. But then, Peter Orazem isn't
running for public office. Even as the increase of the state (and, at the national
level, the federal) minimum wage is receiving mostly rave reviews, Orazem sees
the issue as a simple matter of Economics 101.
Not surprising, as Orazem is an Economics professor at Iowa State
University in Ames.
The Iowa Legislature has just passed a bill raising the minimum wage to $6.20
an hour in April and then increasing to $7.25 an hour in January 2008. The
federal government is considering a raise to $7.25 an hour as well. Thus, Iowa
will be ahead of the surrounding Midwest states except for Illinois, which jumped
up to $7.50. Minnesota is still at $6.15.
But believe it or not, one can't even compare those numbers head to head; and
some other misleading statistics have been bandied about that make the
minimum wage increase look rosier than it really is. In fact, when it comes to
those with the viewpoint that the increase will have negative effects on small
businesses, Orazem said even those predictions may be more dire than the
reality.
So for those of us who have forgotten what we learned back in Econ 101 (the
class packed with 200-300 students, any number of which may have been
absent on the day the laws of supply and demand were discussed), Orazem is
ready to give a quick lesson to any who will listen.
But first, some flawed claims must be dispelled, Orazem said.
“There was a lot of bad information put out there,” he said. “ People who are
claiming to be non-partisan think tanks say 250,000 Iowans will benefit from the
new law.”
But, Orazem said, “Half of that number are (already) being paid over $7.25 an
hour. Suddenly you double the number of people who are going to benefit,” he
said. “What evidence is there of that?”
Even his own daughter started work at a restaurant - and not as a waitress making $7.25 an hour.
Orazem said the portion of the labor force in minimum wage-type jobs is 60
percent. But the percentage of those workers who actually get just the outgoing
minimum wage of $5.15 an hour is just .4 of one percent. That's 2.4 percent of
the overall work force. Based on the previously mentioned 250,000 Iowans in
minimum wage jobs, that means roughly 1,000 people will get the new raise.
Even they, however, shouldn't run out and buy the latest in large-screen
televisions. Nor should those making above the $7.25 figure look forward to the
rising tide lifting all the boats.
Econ 101
“If you increase the price, you lower the demand,” Orazem said. The average
person who works for someone else thinks in terms of items they might
purchase. But it applies to the business owner as well. “Part of the reduction is in
terms of the number of jobs,” Orazem said. “Also, the reductions in hours
worked.
“Whether or not it benefits the low-skilled workers depends on whether the
demand for labor will go up or down. If wages are increasing, we expect hours
will decrease,” Orazem said.
“Half of the minimum wage population works less than 35 hours a week.
Employers will cut back on hours. Earnings for the target population will actually
decline.”
A business owner only has so much money to work with to spend on payroll. “ A
disproportionate share are in retail or low-skill service sectors, restaurants and
entertainment,” Orazem said. “ Do you stay open until 8 p.m.? You might, if you
can generate sales to meet expenses. But if you need a couple of staff you might
just shut down earlier.”
Those who are skeptical of this may read a published paper by Orazem and
Peter Mattila, another ISU professor.
“We did a study of what happened to the earnings of (minimum wage workers)
the last time Iowa had a higher minimum wage than the surrounding states,” he
said, referring to the period between 1990-92.
“On average, their earnings fell,” Orazem said. “It's published. But (politicians)
are not interested in it. It's not politically expedient. It wasn't that employment fell.
Hours per worker fell.”
Proponents of the minimum wage increase point to the fact that the amount
hasn't risen in 10 years. But Orazem said, “Last year, average wages in Iowa
increased four percent, and there weren't any changes. Now the minimum wages
are going to rise. Firms can only pay what they can afford. Do we have to coerce
some firms to give out more? There are firms on the margin, and raising wages
will be very expensive for them.”
Different standards
Aside from all that is another overlooked number. Most newspaper readers have
seen the handy chart showing the minimum wage of each state. That chart
showed Iowa behind Minnesota ($6.15), Missouri ($6.30) and Wisconsin ($6.30).
What the chart didn't show was what businesses were required to even pay
minimum wage. Iowa businesses having $300,000 worth of sales (roughly $800
per business day) are required to pay minimum wage. Had lawmakers not raised
the $5.15 figure, an employee in a northern county might want to cross the
border into Minnesota for a higher wage at a similar type business.
But ... “Minnesota has higher average wages (than Iowa), but they have a higher
minimum (of sales), $625,000, before (a business has to pay minimum wage).
The federal average is $500,000.”
Orazem said that $800 a day represents a small firm, which means Iowa small
businesses are at a disadvantage by having to pay out more in payroll than their
competitors on the border states.
Although much was said about indexing the minimum wage to inflation, Orazem
pointed out that the minimum required sales are not tied with inflation.
Orazem said businesses will eventually adapt, so he's not predicting an
economic crisis. But for all the hoopla about the increase, Orazem said, “The law
is unlikely to have a huge impact.”
So why the raise?
If the raise isn't all it's cracked up to be, why is it being trumpeted as the pot of
gold at the end of a rainbow?
“It's politically expedient because you can claim you're helping the poor without
having to raise taxes,” Orazem said. “But it's an unfunded mandate.”
It also doesn't help the poor. “A disproportionate percentage of the workers are
not poor,” Orazem said. “They're teenagers and some come from wealthy
families.
“If we really cared about the poor, we would target the poor,” Orazem said. “The
Earned Income Tax Credit targets the poor very effectively.” But it comes out of
the state's budget.
Food stamps and housing subsidies are also better for helping the poor, he said,
and those also depend on government having the funds to put the money in
those areas come budget time.