Restoring the Middle Class through Wage Policy

The focus of the minimum wage is too narrow. The minimum wage population is larger than those who earn the statutory minimum; it encompasses the larger low-wage sector. By focusing on only a small segment of the labor force, the minimum wage has been relegated to a debate revolving around youth disemployment effects versus anti-poverty benefits. A policy that is seen as another anti-poverty measure cannot elicit broad political support the way a policy couched as generally for the benefit of the middle class. The minimum wage is a middle-class issue, and there are indeed positive welfare effects for the middle class. Only when we broaden our focus to understand not only what it symbolizes but its potential welfare effects for the middle class can we understand why it is such a contentious issue politically.

Despite the standard model that predicts that minimum wage increases will result in lower employment, the data on this is very incomplete. While there are many studies to support the standard model, at least when it comes to the teen labor market, there are also many studies that show these predictions to be less accurate when it comes to adults. Far from settled, the wealth of studies suggests that the data on the minimum wage is ambiguous at best. This has no doubt made it easier for the issue to be laden with politics. Because the incomplete data is coupled with microeconomic arguments against and macroeconomic arguments for, both opponents and proponents alike can cloak their interests in sound economic theory and present themselves as speaking in the name of the public interest. And yet, from a policy standpoint, the implication could not be more clear, which is that in the face of ambiguity there should be room for policy experimentation based on the needs of the community.

The minimum wage needs to be understood as a reference point for the larger low-wage labor market. By constructing ten wage contours on data from the CPS, it becomes clear that there are welfare effects for the middle class from raising the minimum wage. In years when there were increases in the statutory minimum wage, there were also increases in the median wages of each contour. And in years when there were no increases in the statutory minimum wage, the median wages in each contour remained the same. As those earning at the top of the tenth contour in 2015 were earning the equivalent of $125,000, it would appear that the minimum wage may have positive welfare effects. A policy that places upward pressure on wages can also reduce income inequality. To the extent that the minimum wage does reduce income inequality it again serves as a tool to bolster the middle class. Institutions, in other words, do matter.

Based on the positive welfare effects of the minimum wage for the middle class, the minimum wage can serve as a foundation for jobs creation. The standard models for job creation typically used have been fiscal policy, whether through tax cuts and/or fiscal stimulus packages, and monetary policy. These approaches alone aren’t enough; rather wage policy in the form of a minimum wage also needs to be a critical component in the mix. A minimum wage that forms a foundation for job creation could reduce reliance on the welfare state and foster greater self-sufficiency. In this regard, the minimum wage may also be the most conservative approach to assisting the middle class.

To the extent that the minimum wage can reduce income inequality through its wage contour effects and it affects the broader middle class, it may challenge some of the fundamental assumptions of the median voter theorem. Based on Anthony Downs’ (1957) model of political competition, the median voter theorem holds that as income distributions are skewed to the right, the preferred amount of redistribution is a function of the relative position of the median voter on the income scale. The greater the distance between the median voter’s income and society’s average income, the greater is society’s preferred amount of redistribution. The fundamental assumption being that redistribution will take place through taxation. Data from the Current Population Survey, however, shows that the minimum wage’s welfare effects potentially mitigate the need for redistribution because the distance between the median voter’s income and the average of society is effectively narrowed.

There are other ways to think of the minimum wage. One approach is to ask whether the minimum wage could lead to greater productivity as an efficiency wage. Another approach is to ask whether the minimum wage constitutes a serious civil rights issue because to pay workers low wages may be tantamount to stealing. On a more philosophical level, is there not a conservative argument to make in favor of the minimum wage because better-paid workers would enable them to be more autonomous. These more philosophical concerns when added to the efficiency argument raise the question of whether a minimum wage perhaps paves the way toward government ultimately serving as employer of last resort, whereby the wage paid at job sites would become the effective minimum wage. And yet, the minimum wage may well be a step toward the concept of a universal basic income (UBI), which would not only replace the minimum wage but redefine the very nature of work. As problematic as these approaches may be politically, a minimum wage does force us to grapple with the implications of a minimum wage broader than commonly supposed. Ironically, the idea of the minimum wage as a middle-class issue may represent a middle of the road, and perhaps be the most feasible politically.

A minimum wage that enables individuals to live with greater dignity will enable them to be more autonomous, which also enables them to develop their capabilities. As autonomy is prerequisite for democracy, a minimum wage that reduces inequality and contributes to economic development by serving as a foundation for job creation also makes for greater democracy. But a minimum wage which increases on a regular basis may also lead to greater democracy to the extent that it may serve to develop the social capital of low-wage workers. It isn’t only that a minimum wage will lead to greater democracy, but that it is an essential ingredient.