Middle Class Welfare Effects

Abstract

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. The argument that the minimum wage is beneficial rests on the assumption that the welfare effects are broader than simply raising incomes of the poor. In this chapter, I present data addressing three related issues: the data on the first demonstrates that there are wage contour effects to increases in the minimum wage, and that through these contour effects, a larger segment of the population will derive benefit from increases in the minimum wage. And the data on the second shows the demographics of what can be referred to as the “effective” minimum wage population—those earning in wage contours around the statutory minimum. Therefore, if the minimum wage labor market is constructed in terms of who earns around the minimum wage because we are viewing the minimum wage through the prism of contours, and if because of those contour effects the benefits accrue to a population larger than the “effective” minimum wage population, it then stands to reason that the minimum wage is indeed a middle-class issue. The data on the third, then, shows the effect of the minimum wage on income inequality, which is also related to the health of the middle class. The biggest problem with the minimum wage debate to date is that it has been limited in scope. Much of the research, as we saw in the last chapter, has focused on a limited sub-segment of the labor market: those specifically earning the statutory minimum wage. And yet, if the statutory minimum wage can be viewed as a main reference point for wage setting in the larger low-wage labor market, the minimum wage assumes a larger dimension. The minimum wage then becomes about the “effective” minimum wage population, which is now comprised of low-wage workers who earn around the statutory minimum. But this can only be understood if we examine the minimum wage through the prism of wage contours: the intervals workers are earning in above the statutory minimum wage. Small businesses often claim that increases in the minimum wage will hurt them (Haarlander and Tan 2004). In other words, the genuinely political opposition would appear to be alluding to the effects of wage contours. The 2014 CBO report appeared to allude to wage contour effects when it suggested that as many as 16 million Americans were going to see their pay, despite the fact that no more than 3.6 million hourly wage earners were getting paid at or below the statutory minimum wage. Clearly if only 3.6 million hourly workers were paid the statutory minimum, then the benefits were accruing to more than those earning the statutory minimum. It then had to follow that more than 12 million of these workers were earning wages in contours above the minimum. The implication appeared to be clear: an increase in the statutory minimum wage would force employers to raise the wages of their workers who weren’t earning the statutory minimum, but who were earning around the minimum. Although the CBO report did not address itself to the issue of rising income inequality, much of the literature touting the possible welfare benefits of the minimum wage note that one benefit would at least be a decline in the rise in income inequality. Why is income inequality so critical to the discussion of larger benefits to the middle class? Because the growing gap between those at the bottom, mostly low-paid and low-skilled workers, and those at the top, mostly highly paid and highly skilled workers, speaks to a significant issue: the disappearance of the middle.