Policy Documents

Research & Commentary: Iowa Minimum Wage Reform

February 6, 2014

Iowa Senate Majority Leader Mike Gronstal and House Minority Leader Mark Smith have said members of their caucuses will introduce proposals this session to raise the state’s legal minimum wage. One bill would incrementally increase Iowa’s minimum wage over two years, resulting in a minimum hourly pay of $10.10 by the beginning of 2016. This comes on the heels of U.S. Sen. Tom Harkin of Iowa calling for the federal minimum wage to be raised from $7.25 to $10.10 over three years.

Proponents of minimum wage laws say their purpose is to create a minimum standard of living to protect employees’ health and well-being. But what minimum wage laws actually do is outlaw the hiring of anyone willing to work for less than the amount specified in the law. It becomes illegal to hire anyone whose productivity is less than what is necessary to justify a higher wage. Labor union leaders have been the main advocates of higher minimum wage laws in many states as they seek to protect union workers from competition from non-union workers.  Consumers, too, are victims: They are forced to pay higher prices for goods and services.

The negative impact of minimum wage laws on less-skilled workers is not just a theory.  A survey of economic research conducted by economists at the University of California-Irvine and the Federal Reserve Board and published in 2007 found 85 percent of the studies they considered credible demonstrate minimum wage laws cause job losses for less-skilled workers

Iowa’s current minimum wage is equal to the federal minimum wage and competitive with all of its neighboring states, with only Minnesota having a lower one, at $6.15. A minimum wage of $10.10 would far surpass those of Iowa’s neighbors—the proposed rate is even higher than what is now being considered in Illinois, $10.00. 

Supporters of these laws argue they protect workers from exploitation by employers and reduce poverty. Opponents cite evidence that increasing minimum wage laws is not an effective way to address poverty and often has the opposite effect by creating barriers to entry for workers with less skill and education. In a 2010 study, economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum wage between 2003 and 2007. 

Economist Walter Williams writes, “Workers earning the minimum wage or less tend to be young, single workers between the ages of 16 and 25. Only about 2 percent of workers over 25 years of age earn minimum wages.” When minimum wage laws require businesses to pay their workers higher wages, businesses have to make adjustments elsewhere to offset the increased costs in order to maintain profitability. These cuts lead to reduced hiring, fewer work hours for employees, diminished fringe benefits for employees, and higher prices for consumers.  

Increasing the legal minimum wage is not an effective method of addressing poverty, and it harms workers by creating barriers to entry for less-skilled and less-educated people. Increasing Iowa’s minimum wage will put more people out of jobs and slow the state’s economy. 

The following articles examine minimum wage hikes and their effects on employment.

Iowa Legislature Set to Resume Minimum-Wage Battle
http://thegazette.com/2014/01/13/iowa-legislature-set-to-resume-minimum-wage-battle/#sthash.nlwq9HmG.dpuf
Writing in the Cedar Rapids Gazette, Mike Wiser reports on plans by legislative leaders in the Iowa Senate and House to introduce bills increasing the state’s minimum wage this session. 

Teen Unemployment in Iowa
http://heartland.org/policy-documents/teen-unemployment-iowa
Amy K. Frantz of the Public Interest Institute analyzes teen employment in Iowa and argues, “allowing businesses to hire teen workers at a lower wage level would open up opportunities for more teens to gain this valuable work and life experience. With a higher minimum wage, business owners need a certain level of productivity and skill set to make hiring an additional worker worthwhile, and often teen workers do not have the skills required, and thus often remain unemployed.” 

Do Workers a Disservice - Raise the Minimum Wage
http://heartland.org/policy-documents/do-workers-disservice-raise-minimum-wage
In this Public Interest Institute Institute Brief, Robert N. Stewart argues minimum wage laws actually hurt the people they are designed to help: “Most of these people are teenagers working part-time or unskilled workers seeking to advance to higher paying positions. To many of these workers, raising the minimum wage will either result in unemployment or a lower-paying position. Raising the minimum wage, altruistic as it may feel, is actually doing these workers a disservice.” 

The Minimum Wage Delusion, and the Death of Common Sense
http://www.cato.org/publications/commentary/minimum-wage-delusion-death-common-sense
Writing for Forbes, James A. Dorn of the Cato Institute argues the commonly held belief that the minimum wage helps the poor is a delusion: “The belief that increasing the minimum wage is socially beneficial is a delusion. It is short-sighted and ignores evident reality. Workers who retain their jobs are made better off but only at the expense of unskilled, mostly young, workers who either lose their jobs or can’t find a job at the legal minimum.” 

Busting 5 Myths About the Minimum Wage
http://blog.heritage.org/2013/03/05/busting-5-myths-about-the-minimum-wage/
James Sherk of The Heritage Foundation debunks five myths about minimum wage workers, often used by proponents of minimum wage laws: “A higher minimum wage would help some workers, but few of them are poor. The larger effect is hurting the ability of potential workers living in poverty to get their foot in the door of employment. A minimum wage hike might help politicians win plaudits from the press, but it wouldn’t reduce poverty rates.” 

Unintended Consequences of Raising the Minimum Wage
http://mercatus.org/publication/unintended-consequences-raising-minimum-wage
Antony Davies of the Mercatus Center examines arguments for and against minimum wage increases and presents new results comparing employment for workers with differing educational attainments. 

The Negative Effects of Minimum Wage Laws
http://heartland.org/policy-documents/negative-effects-minimum-wage-laws
Mark Wilson of the Cato Institute reviews the economic models used to understand minimum wage laws and examines the empirical evidence. Wilson describes how most of the academic evidence shows minimum wage laws have negative effects, and he discusses why some studies produced seemingly positive results. 

The Negative Effects of the Minimum Wage
http://heartland.org/policy-documents/negative-effects-minimum-wage
David R. Henderson of the National Center for Policy Analysis examines several of the negative effects of the minimum wage, including its effect on unemployment, job benefits, and competition. 

Research & Commentary: Earned Income Tax Credit vs. Minimum Wage Laws
http://heartland.org/policy-documents/research-commentary-earned-income-tax-credit-vs-minimum-wage-laws
The Earned Income Tax Credit (EITC) and minimum wage laws have been two of the primary mechanisms the federal and state governments have used to help low-income families move out of poverty. A debate is currently ongoing in many state legislatures and Congress over which of these two policies is more effective and should be expanded. Recent studies have shown the EITC to be more effective. In this Research & Commentary, Matthew Glans examines the Earned Income Tax Credit and minimum wage laws from multiple perspectives. 

Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research
http://heartland.org/policy-documents/minimum-wages-and-employment-review-evidence-new-minimum-wage-research
David Neumark and William Wascher review the literature on the employment effects of minimum wages—in the United States and other countries—that was spurred by new minimum wage research beginning in the early 1990s. Their review indicates there is a wide range of estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. Their review found very few studies that provided convincing evidence of positive employment effects of minimum wages. 

Thinking about Local Living Wage Requirements
http://heartland.org/policy-documents/thinking-about-local-living-wage-requirements
Timothy J. Bartik of the W. E. Upjohn Institute for Employment Research reviews what is currently known about the benefits and costs of different varieties of a “living wage”: a local government requirement, now adopted by more than 50 local governments, for wages above the federal minimum imposed on employers with some financial link to the local government. The paper concludes moderate living wage requirements applied to the local government’s own employees, and contractors’ and grantees’ employees who are funded by the local government, may do more good than harm. However, excessive living wages or living wages applied to non-city-funded workers are more likely to have negative side-effects. 

Living Wage and Earned Income Tax Credit: A Comparative Analysis
http://heartland.org/policy-documents/living-wage-and-earned-income-tax-credit-comparative-analysis
Writing for the Employment Policies Institute, Mark Turner and Burt Barnow argue “living wage” laws are vastly less efficient than localized Earned Income Tax Credit programs. 

Minimum Wages, the Earned Income Tax Credit, and Employment: Evidence from the Post-Welfare Reform Era
http://heartland.org/policy-documents/minimum-wages-earned-income-tax-credit-and-employment-evidence-post-welfare-reform-
David Neumark and William Wascher examine the effects of minimum wages and the EITC in the post-welfare reform era. 

Raising the Minimum Wage Hurts Vulnerable Workers’ Job Prospects without Reducing Poverty
http://heartland.org/policy-documents/raising-minimum-wage-hurts-vulnerable-workers-job-prospects-without-reducing-povert
Although minimum wage laws are intended to reduce poverty, in reality they encourage teenagers to drop out of school and reduce low-income workers’ future job prospects and earnings, observes James Sherk of The Heritage Foundation.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.