On Labor Day 2013 fast-food workers all over the US went out on a one-day strike for a $15 an hour minimum wage. Since then, fast-food workers have continued to engage in sporadic daily strikes for a minimum of $15 an hour. Meanwhile, over the last several years several states have either adopted a minimum wage higher than the federal minimum wage of $7.25 an hour or have raised their existing ones. Currently, at least 29 states have minimum wages that are higher than the federal minimum, and of them 16 have adopted a mechanism for their automatic adjustment so that they can keep up with inflation and no longer lose value. Additionally, several localities have legislated $15 an hour minimum wages, which in many cases will fully take effect by 2020. All of this clearly speaks to three trends. The first is that the minimum wage has failed to keep pace with inflation. Historically the minimum wage tended to be set at 50 percent of average annual hourly earnings. In 2015 it was only 28.9 percent of an average annual hourly wage of $25.08. In 1968 the minimum wage adjusted for inflation was the equivalent of $10.97 an hour in 2015 dollars. In 1968 a minimum wage earner was at 106 percent of the federal poverty level, but in 2015 it is below 80 percent.
The second trend, and not unrelated to the first, has been increasing income inequality. Nobody believes that an increase in the minimum wage will make us equal by any stretch, nor is that really the goal. And it certainly wonât address what many have observed as the pulling away of the top from the rest of us in recent years (Piketty 2014; Stiglitz 2012; Hacker and Pierson 2010). But the rate of increase would clearly be less. Much of the literature suggests that wage inequality will be less, specifically in the lower tail of the distributionâthe 50/10 percentile ratio (Belman and Wolfson 2014). Even those who reject the revisionist literature that the decline of labor market institutions has contributed to growing inequality because of the pulling away of the top do acknowledge that they do affect the lower tail of the distribution (Autor et al. 2008).
The third trend is that wages overall, especially among the middle class, have been stagnating for more than three decades. If nothing else the protests for a $15 an hour minimum reflect a level of frustration with an economic system that appears to reward CEOs with compensation packages worth millions while workers struggle to make ends meet. But it also appears to reflect a level of frustration with a political system that often seems helpless if not totally oblivious to the concerns of not only low-wage workers but the middle class generally (Bartels 2008; Gilens 2012). These protests, then, need to be placed within the context of a growing âchasmâ between the very top and the rest of us (Smith 2012), or what some refer to as increasing polarization due to rising inequality and the skewed politics toward the extreme wealthy that has come from that inequality (McCarty et al. 2008).
State of the Current Minimum Wage Debate
Much of the current debate over the minimum wage has revolved around employment consequences. Critics of the minimum wage have tended to focus on the employment side while supporters of the minimum wage have focused on the benefits of pay increases specifically for those in poverty. The debate in short has amounted to a contest between those arguing the employment consequences versus the anti-poverty benefits. Moreover, those arguing the employment consequences have focused specifically on teenagers, largely because for many years they constituted the majority of minimum wage workers, or at least those earning the statutory minimum. While this may have been true at least as late as three decades ago, it is less so today. Nevertheless, since the report of the federal Minimum Wage Study Commission was published in 1981, it has been the conventional wisdom that a 10 percent increase in the minimum wage results in a 1â3 percent reduction in employment among teenagers. The same commission did find employment consequences to be considerably less among adults.
Still, much of the literature on the employment consequences focused specifically on teenagers. Beginning in the mid-1990s, however, following studies of the fast-food industry by David Card and Alan Krueger (1995a, 1998), and particularly after 2000, with the New Minimum Wage Research, as Belman and Wolfson (2014) call it, much doubt has been cast on the conventional wisdom. It isnât that all studies have been found to be incorrect, rather because the focus has only been on teenagers, the data on the minimum wage has been skewed when applied to older workers and when factoring in issues of heterogeneity (Dube et al. 2010; Allegretto et al. 2011). Because the data only focus on specific segments of the labor market, the overall conclusions that can be drawn from them are ambiguous. That is, the effects are incomplete. While we are told that some groups may bear costs in the form of job loss, we are being told that other groups may derive benefits and that on the whole in a calculus could outweigh the costs. Critics claim that there is no reason to look at adults when most minimum wage workers arenât adults, but are teenagers. To the New Minimum Wage Research they respond that the minimum wage is so much below a market-clearing wage that it could not possibly have an effect. Those that argue for the minimum wage often assert that the minimum wage is too low because it has failed to keep pace with inflation. The critics who acknowledge that higher minimum wages havenât had an effect on employment because they are still below market-clearing wages are ironically acknowledging the supportersâ point that the minimum wage is too low.
Still, critics maintain that the minimum wage is a poor tool for assisting the poor because most minimum wage earners are not poor (Burkhauser and Finegan 1989; Sabia and Burkhauser 2010). On the contrary, they are secondary earners in that they are either teenagers in their parentsâ households or spouses of primary earners. And yet to refer to them as secondary effectively trivializes them because they are now placed in a category of other whereby their contributions are deemed to be unimportant (Schneider and Ingram 1993). If they are unimportant or only contributors to a household rather than principal household supporters, then there is no need to raise their wages, especially if there may be negative employment consequences.
The more poor people who can be categorized as unworthy, the less responsibility society has to care for their well-being. The neoclassical synthesis, in short, assumes a minimum wage to be inefficient, in part, because it isnât necessary. If the minimum wage was primarily benefitting teenagers and not benefitting those working to support a family, what was the logic of the minimum wage at all? It was simply irrelevant. At the same time, it was irrelevant because it did not bear on the poverty rate. Moreover, for those minimum wage earners who are poor, the minimum wage will only hurt them because employers will likely respond by substituting technology for low-skilled workers, who are disproportionately among the ranks of the poor. Of course, all of this makes sense if these are indeed the demographics of the low-wage labor market. But by focusing on this narrow construction, we are missing the larger low-wage labor market that may also be affected by the statutory minimum wage.
The narrow focus of the debate has really obscured what the minimum wage is really about, and that is the middle class. This book is about the minimum wage and the middle class. To suggest that the minimum wage is ultimately a middle-class issue would strike most as rather counterintuitive. After all, how can a wage that is so far below that of most middle-class workers really affect them? Although the minimum wage was certainly intended to raise the wages of those at the bottom of the distribution, it was also intended to be more. At a minimum, it was intended to give low-wage workers a measure of bargaining power they otherwise lacked because of the asymmetrical power imbalance between them and their employers. Because there was now a floor, there was also a limit to how much they could be exploited. But it was also viewed as a means to expand purchasing power, which would also be good for the economy. Historically, however, the minimum wage was a labor-management issue whose expected benefits would be increased efficiency, an expansion of purchasing power, and ultimately greater demand for goods and services.
One wonders how it is that a non-issue like the minimum wage which only 2 percent of the labor market actually earns could ruffle the number of feathers it does whenever the issue comes up for public debate. The issue often elicits the most intense animosity from its opponents. In this book, I argue that the effects are much larger than the current debate would suggest. To relegate the minimum wage labor market to the 2 percent that actually earns the statutory minimum wage is to obscure a growing problem in the USA. That is, the âeffectiveâ minimum wage labor marketâthose that earn in wage ranges around the statutory labor marketâhas grown considerably over the last three decades and now comprises almost a fifth of the American labor market. Although this âeffectiveâ minimum wage labor market is still dominated by those lacking in skills, their levels of educational attainment are higher now than they were more than 30 years ago. Moreover, these workers are also older.
That a growing segment of the American labor market is now among the ranks of the effective minimum wage population no doubt speaks volumes to the changing economic base of the economy. What has often been missed here is that with increased globalization and the emergence of a two-tiered economy with highly educated and highly paid workers at the top of the wage distribution and poorly educated and poorly paid workers at the bottom, the growth of this âeffectiveâ minimum wage population has to be seen as a manifestation of the disappearing middle class. In recent years various authors have written about the business communityâs assault on the middle class through deliberate public policy decisions that have resulted in a widening inequality gap between the top and the bottom (Smith 2012; Stiglitz 2012; Hacker and Pierson 2010). I am not as concerned about how we reached this point as I am about where we go from here. In the pages that follow I intend to show how the minimum wage, as but one tool in a larger arsenal of public policy revolving around middle-class economics, can be used to help restore the middle class. But this requires taking a broader view of the minimum wage.
In making this argument am I suggesting not only that economic policy models based on the neoclassical economic synthesis have been wrong, but that progressive policy that has animated much of the political leftâindeed the contemporary Democratic Partyâhas been misguided. If we as a nation want to close the income gap, create a higher wage economy, and restore the middle classâwhich is also an essential ingredient in the maintenance of strong democracyâthen we need policies that are based on what Martin Gilens (2012) calls âtargeting within universalism.â This means that policy has to be couched in a way that it appeals to a broad spectrum of voters. The minimum wage can only have broad appeal if it is couched as a middle-class issue. If it is only an issue that affects teenagers who are not considered to be poor, it simply wonât resonate with most voters.
Middle-Class Economics?
The public debate in recent years has been witness to voices about what best to do for Americaâs middle class. On the one hand, there is the argument that policy skewed toward the interests of the wealthy has effectively resulted in what journalist Hendrick Smith (2012) calls the stealing of the American dream. Policies have been pursued that have effectively redistributed wealth and income to the wealthy at the expense of the middle class. There may be another school of thought that the decline of the middle class has been due to deteriorating families and values (Murray 2012). Some might, of course, take issue with this and maintain that at the end of the day it is about income.
Discussions about how to rebuild the economy and the middle class have revolved around the standard boilerplate solutions. The political left focuses on new programs financed through higher taxes on the rich while the political right recycles the standard laissez-faire policies of the past: lower taxes and reduced regulation. If government would simply unleash the marketplace, ever...