Peter Orazem is a University Professor of economics at Iowa State University and has studied how changes to the minimum wage impact workers. Orazem said an executive order increasing the minimum wage federal contractors must pay employees will have little impact on most government contracts.
“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.”
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.
In a 2002 study, published in the Journal of Labor Research, Orazem analyzed changes in worker pay in Iowa 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 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.”
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