Minimum wage just doesn’t keep up

The State of Working Iowa 2011 offered a good perspective on the arguments we are hearing now against an increase in the minimum wage. We should raise it and index it to inflation.

Noga O'Connor
Noga O'Connor

Once again there is attention in Iowa to the question of raising the minimum wage. This happens every few years after the passage of a new minimum, when it inevitably becomes outdated due to inflation, which hits that part of the working population the hardest.

So, right on schedule, we are beginning to hear many of the same arguments against the minimum wage that are thrown in its path by entrenched business lobbyists who recite talking points that they want to pass off as research.

As the Iowa Policy Project suggested back in 2007, when the General Assembly passed a strong minimum wage that put Iowa among the leaders in the nation on the issue, one important step to avoid these regular arguments is to find a good minimum wage, pass it, and index it to inflation.

IPP’s State of Working Iowa 2011 set the stage for the latest discussions with one of its recommendations last fall:

Reward Work I: Raise and index the minimum wage

Iowa raised its minimum wage to $7.25 in 2007, a rate which was matched by the new federal minimum in 2009. We are now one of 23 states that echo the federal minimum wage (19 states have higher rates). Even with those increases, the real (inflation-adjusted) minimum wage is still near its postwar low (in real dollars, the federal minimum was above $8.00/hr from 1960-1980, peaking at $10.38 in 1968). And since those legislated increases, the Iowa minimum has lost about 10 percent of its value and the federal, coming later, has slipped 5 percent. If, at the time we last raised the minimum wage in 2007, we had simply indexed its value to inflation, the Iowa minimum would be $7.90/hr — an increase that would put another $1,300 in the pocket of a full-time minimum wage worker. [1] Indexing the minimum would protect its future value from the eroding effects of inflation, allow future legislative sessions to focus attention in other areas instead of on these redundant debates, and provide employers with a measure of predictability when forecasting future costs. [2]

Proposals to raise the minimum wage often provoke worries about job loss. Recent research has not only punctured this myth, but underscored the substantial and sustained economic benefits of a higher wage floor. Recent studies of cities adopting higher minimum wage rates, and of job performance in contiguous counties with differing minimum wage rates, have found that higher minimum wages do not reduce employment.[3] A higher minimum wage, like all policies that put more money in the pockets of
working families, is also widely recognized as an effective form of economic stimulus. [4] Indeed, many employers have come to appreciate that a higher minimum wage offers them a net benefit, “by increasing consumer purchasing power, reducing costly employee turnover, raising productivity, and improving product quality, customer satisfaction and company reputation.”[5] (emphasis added)

[1] Authors’ calculations using Bureau of Labor Statistics inflation calculator
[2] Raising Minimum Wage Helps Iowa’s Poor Families. Iowa Policy Project, January 2007.
[3] Dube, A., Lester, T. W., and Reich, M. (2010). Minimum Wage Effects across State Borders: Estimates Using Contiguous Counties. The Review of Economics and Statistics, 92(4): 945–964. ; Schmitt, J. and Rosnick, D. (2011). The Wage and Employment Impact of Minimum-Wage Laws in Three Cities. Center for Economic and Policy Research.
[4] Aaronson, D., Agarwal, S., and French, E. (2011). The Spending and Debt Responses to Minimum Wage Increases. Federal Reserve Bank of Chicago, WP 2007-23. Falling Wages Curb Consumer Spending, Economic Recovery. National Employment Law Project news release, July 2011.
[5] Business Owners and Executives for a Higher Minimum Wage: Raise Minimum Wage From $5.15 to $7.25. An online petition of Business for a Fair Minimum Wage. 

Posted by Noga O’Connor, Research Associate

Author: iowapolicypoints

The Iowa Policy Project is a nonprofit, nonpartisan organization that provides research and analysis to engage Iowans in state policy decisions. We focus on tax and busget issues, the Iowa economy, and energy and environmental policy. By providing a foundation of fact-based, objective research and engaging the public in an informed discussion of policy alternatives, IPP advances effective, accountable and fair government.

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