In this political season, both the minimum wage and income inequality have become hot-button political issues. Because the minimum-wage debate has tended to revolve around opponents arguing the employment consequences and the proponents arguing its anti-poverty value, what has been lost is that the minimum wage is fundamentally about the middle class. Everybody claims to be speaking in the name of the middle class, but nobody has a serious proposal for helping to sustain and grow it.
The political left focuses on new programs financed through higher taxes on the rich, while the political right recycles the laissez-faire policies of lower taxes and reduced regulation. If government would simply unleash the marketplace, the argument goes, everyone would prosper. Meanwhile, the gap between the top and the bottom only continues to grow.
Income inequality is important because of what it symbolizes, which is a two-tiered or dual economy with highly educated and skilled workers at the top of the wage distribution and poorly educated workers with little if any skills at the bottom. The issue is not income inequality per se, because it is fantasy to believe that we can all be equal. We aren't all born with the same natural endowments and we don't all make the same choices. In a market economy where freedom of choice reigns, there will always be inequality. Rather, the issue is the increase in income inequality, because it is with this widening gap that we are able to see that the middle class is being squeezed out.
Rebuilding the middle class requires boosting the purchasing power of workers so that they can drive the economy by increasing their aggregate demand for goods and services. Here is where the minimum wage, income inequality and the middle class can spoken about in the same breath.
Policymakers who would like to truly do something for the middle class without doing anything radical would be wise to look no closer than the minimum wage. The issue has been receiving considerable attention because President Obama has called for increasing the federal minimum wage to $10.10 an hour. Several states already have raised their minimum wages since the beginning of this year, and on a couple of occasions fast-food workers have gone out on day-long strikes for a $15-an-hour minimum wage. When one considers that the median hourly wage in 2012 was $14.90 an hour, a $15-an-hour minimum does not seem so far-fetched.
The minimum wage should not be increased simply because it is a matter of economic justice. On the contrary, the minimum wage needs to be raised because its macroeconomic benefits would shore up the middle class. Its benefits are broader than opponents would like you to believe.
Consider for a moment a wage distribution divided into intervals. If the first were to begin with the actual minimum wage and range to 25 percent above that figure, the second then ranges an additional 25 percent, and so on. Data from 1962-2008 that I gathered shows that when 10 such intervals were created, accounting for up to 70 percent of the labor force, the median wage in each interval increased in years that the minimum wage increased, and in years when it did not increase the median wage in each interval remained the same. The ripple effects from raising the minimum wage were effectively benefitting the middle class.
Increasing the minimum wage, then, will create a new floor, and wage increases will ripple through the wage distribution. Moreover, a policy that can shore up the middle class will also reduce income inequality and serve as a foundation for job creation. The real reason income inequality has been increasing and the middle class has been shrinking is because of stagnating wages. Increasing the minimum wage would go far toward reversing that trend.