Sioux City Journal, IA
04-01-07
Labor supply, not minimum wage, drives higher pay
By Michele Linck Journal staff writer
Iowa's minimum wage increase may touch off a little inflation, Iowa State
University professor of economics Peter Orazem said. But it likely won't be in
the northwest part of the state and it likely won't be much. Here's why.
Sioux City is in a different position geographically than Des Moines and the rest
of the state, Orazem said. That's important not only because South Dakota and
Nebraska don't have to pay a higher wage, but because all the rest of Iowa's
neighbors already do, at least until Jan. 1.
As Iowa's small businesses pay their lowest-wage workers more, many will likely
choose to raise prices. That will be harder to do in areas bordering Nebraska or
South Dakota. (Nearly all large companies already pay their lowest paid workers
at or above the new minimum.)
And, he said, many more Iowa businesses are subject to the state's minimum
wage law than are their counterparts in South Dakota and Nebraska. In Iowa, all
businesses with an annual gross of $300,000 or more must pay it. In South
Dakota and Nebraska, minimum wage isn't required until annual gross receipts
reach $500,000.
Orazem said if businesses in Des Moines, for example, raise prices to
compensate for rising wages, consumers have little choice. But in Sioux City,
they can simply drive across the border. He noted that some Sioux Cityans will
be going out of state to beat the additional new $1 tax on cigarettes and might
just decide to pick up a few other things while they're there.
That proximity makes it difficult for Sioux City firms to raise their prices by much.
But, he said, it's not the minimum wage that truly drives wage gains, and thus
inflation, in Iowa; it's the labor supply. "Wages rose 4 percent in Iowa last year,"
he said, "but the minimum wage didn't go up. It's because the labor demand was
high and the unemployment rate in Iowa is very low." (It dropped 0.1 percent, to
3.3 percent in February. The national rate for February was 4.4 percent, also
down 0.1 percent.)
Orazem said only 1.4 percent of the Iowa work force was at the $5.15 per hour
minimum wage. He said that number won't grow a lot with today's $1.05
increase. "There is upward pressure on wages in Iowa independent of what's
happening with the minimum wage," he said.
And he said, historically wages already at or above the new minimum wage do
not tend to rise in a "ripple effect" when the minimum goes up. That was a fear of
those who lobbied against the increase. Wages go up because workers get
periodic raises and because of a tight labor supply. Any inflation that follows
today's wage hike will be due more to a growing demand for fewer workers.
"They get paid whatever the market will bear," Orazem said. "That's why so few
people are paid the minimum wage."