Implications for Policy

The stakes here are high, because competing explanations also suggest competing political solutions. If the general trend is toward a polarized labor market, then the logical political solution is investment (public and personal) in education — providing workers the skills to jump from the low-wage to the high-wage jobs. Indeed, education remains vital.  Educated workers have better prospects.  And investment in education is one of the few state policies that consistently and reliably return higher wages, sustained growth, and shared prosperity.  But it is also clear — based on the high unemployment and underemployment rates of young college graduates, and the increasing proportion of educated workers in low-wage jobs — that education alone will not solve our problems.

The unevenness and weakness of job growth is a reflection of slow growth and weak demand in the economy — meaning jobs are slow to return, and lousy jobs are crowding out good jobs in the recovery. For this, the best political response is a macroeconomic policy that stimulates the economy and combats unemployment. A state can do very little in this respect, save to participate fully and generously in opportunities (such as infrastructure spending, or extended unemployment insurance) presented by federal policy. State “incentives” do little to create jobs and, through competition with other states, may actually bid down the job standards and tax returns of any new investment. For this reason, we remain skeptical about Iowa’s expansive business tax breaks and credits, whose costs — in the form of direct assistance or forgone revenue — dwarf their returns.

In turn, we see a general trend toward lower-wage work, driven in part by occupational shifts across sectors and in part by downward pressure on wages across sectors. For this, the best political response is to gird the wage floor and enhance the bargaining power of workers. The most effective levers for this in state policy are the minimum wage, the enforcement of the minimum wage and other labor standards, a generous Earned Income Tax Credit, and support for collective bargaining rights. Let’s take each of these in turn.

The minimum wage now worth substantially less than it was a generation ago. As Figure 16 suggests, a minimum wage that had kept pace with productivity, inflation, or average wages would be substantially higher than even the most ambitious bumps currently being discussed. As it stands, the minimum falls substantially short of allowing Iowa workers and their families to meet the basic living standards.

Figure 16. INTERACTIVE Benchmarking the Minimum Wage

Basic RGBSource: IPP calculation of real minimum wage using CPI-U-RS; federal poverty guidelines for 2013; basic cost of living based on Des Moines area
calculations in The Cost of Living in Iowa, Iowa Policy Project, May 2012,

The minimum wage and other labor standards can only raise the floor if they are enforced. On this score, Iowa is a stark laggard — employing one wage and hour investigator for a nonfarm workforce of over 1.5 million. As a result, “wage theft” — including paying less than the minimum, forcing workers off the clock, failing to pay overtime, or misclassifying workers as “independent contractors” (and not making tax or social insurance contributions on their behalf) — is rampant. Wage theft in Iowa robs workers of the wages they have earned, robs state and local businesses of consumer spending, and robs local, state and federal governments of tax revenues and social insurance contributions.

After a number of false starts and gubernatorial vetoes, the Iowa Legislature finally managed to expand the state’s Earned Income Tax Credit, which will rise from 7 percent to 15 percent of the federal credit over the next two years. One in six Iowa households benefit from the federal Earned Income Tax Credit, for a total credit of over $400 million. The EITC rewards work, and eases the tendency of the state code to over tax low-wage workers. “A state that hands out tens of millions of dollars in tax breaks to large firms in the name of job creation,” as the Cedar Rapids Gazette concluded this spring, “should be able to afford providing a justifiably bigger break to Iowans already on the job.” Unfortunately, this small concession (a credit of 20 to 30 percent would make a bigger difference) was accompanied by lavish property tax breaks and business tax credits — to the tune of about $10 in effective business tax cuts for every dollar spent on the EITC increase.

Finally, we return to a consistent theme in these reports: the importance of collective bargaining to wage stability and the economic security of working families. Iowa’s low unionization rate (12.3 percent overall, 5.9 percent in the private sector) and “right-to-work” status do not encourage new investment or boost the state’s competitiveness (indeed, the consensus is that such laws have no discernible impact on job creation). But they do depress wages — for union and non-union workers alike — by an average of $1,500 a year. And, since decent job-based benefits often flow from collective bargaining, the hit to total compensation, family incomes, and family security is even harsher.

So, the lessons are clear as well: Shared prosperity rests on policies and institutions (collective bargaining, a decent minimum wage, strong labor standards, etc.) that sustain the bargaining power of workers. In the absence of those institutions, only exceptional stretches of full employment have interrupted the failure of the wages, incomes, and living standards of ordinary Iowans to keep up.

%d bloggers like this: