Minimum wage increase will do little for those who need it most, says Iowa State professor

AMES, Iowa – An executive order increasing the minimum wage federal contractors must pay employees to $10.10 an hour will have little impact on most government contracts, said Peter Orazem, a University Professor of economics at Iowa State University. That’s because contractors are already required to pay a prevailing wage under the Davis Bacon Act, which is often more than the minimum wage.   

“Except for some very low-wage jobs, the increase is not going to have much of an effect,” Orazem said. “In most cases, federal contracts are paying wages above the local average and oftentimes it’s union scale, so minimum wage becomes a non-issue.”

In signing the executive order, President Obama encouraged Congress to raise the federal rate for all workers to help grow the economy. Too often the economic realities get lost in the political debate over the minimum wage, Orazem said. The assumption that an increase will help workers and benefit the economy is rarely true.

“If you wanted to help the working poor it would be much better to expand the earned income tax credit. It is very well targeted to the working poor and doesn’t have any adverse effect in terms of employment,” Orazem said.

“You don’t necessarily make the economy better off by artificially changing input prices. If that was all that it took, it would be a lot easier. An increase is not going to create jobs; it’s not going to make people richer. It will help some people and hurt some people, so in the end it’s a wash in terms of the overall economy,” he added.

To illustrate his point, Orazem referenced a 2002 study, published in the Journal of Labor Research, in which he analyzed the impact of Iowa’s minimum wage. The study looked at changes in worker pay from 1989 to 1992. During this time, Iowa set its first state minimum wage, which was 50 cents more than the federal rate and exceeded the rate of neighboring states.

Orazem found a slight reduction in the number of people working after the rate was increased. But instead of cutting jobs, businesses were more likely to cut hours, and that hurt workers.

“We traced the earnings of people making minimum wage before Iowa raised its rate. On average, that group actually lost income as the minimum wage increased; they didn’t gain income,” Orazem said. “The primary reason was cuts in hours.”

Orazem said about 14 percent of all employed workers would benefit if Congress raised the minimum wage to $10, similar to the president’s executive order. According to the Bureau of Labor Statistics, about half of the workforce is paid an hourly rate, which is subject to the minimum wage. Of those hourly workers, 27 percent are paid less than $10.