Waging War: The Value of Raising the Minimum Wage

, by Leyla Wade, Contributing Writer

The boundaries that mark the middle class are becoming increasingly ambiguous, and policymakers need to focus on a boundary that can be clearly defined—the minimum wage.

When we think of the American dream that lies at the heart of American capitalism, we think of the middle-class family living behind the white picket fence. The middle-class family is financially secure, and optimistic about the future. The middle-class family owns a car and takes summer vacations. Being middle class is more than just earning a certain annual income; it’s an idea. Because of this, it is often difficult to define in concrete terms.

What makes the concept of middle class even more vague is the growing disparity of wealth across the country, as well as the remarkable level of income volatility in recent decades. “Income volatility has given many people both a taste of life in an upper-income bracket and a bracing slap of instability,” explains journalist Patricia Cohen. With the impression that financial standing can change at any moment, deciding who is and isn’t a member of the middle class is a challenging feat.

The potentially worrisome thing about this is that policymakers tend to disregard such ambiguity. Presidential candidates Hilary Clinton and Bernie Sanders have set the upper boundary of the middle class at an annual income of $250,000, and have based their proposed tax policies on this parameter. $250,000 a year is a huge income by many standards—higher than what would have placed a household in the top 5 percent in 2014. This goes to show that $250,000 is, as economist Martin Sullivan says, “an arbitrary number.”

Realistically, it may be that there’s no way to avoid using arbitrary numbers in policymaking. The kind of reform that is oriented around the middle class (i.e., tax cuts for the middle class, increases in overtime pay, etc.) may be essential, and the decision to draw the line somewhere may be a necessary sacrifice of validity for efficiency. In other words, we shouldn’t reject middle-class-oriented reform. Rather, we should focus on creating fair thresholds where we can create them.

The distinction between living in need and living in comfort is easier to draw than the distinction between living in comfort and living in luxury. Minimum wage is a matter of literal deprivation, rather than relative deprivation. People simply cannot live on $7.25 an hour (the federal minimum wage) in the present economy, as evident in the fact that “a third of Americans today live in or near poverty.” Raising the minimum wage needs to be a priority, and several of the current presidential candidates agree. Thus, the remaining question is, how much should we raise it?

Because most employers can only afford to pay their employees so much, there is a delicate balance that needs to be struck. What constitutes balance depends on the economy, and it’s difficult to predict how the economy will look in 2022—the year by which Clinton’s and Sanders’ respective minimum wage proposals would be phased in.

The good news about a long phase-in, however, is that it would allow time for the economy to catch up to an optimistic proposal. This is why we can and should go for an ambitious raise, such as Sanders’ goal of $15 an hour, rather than a more cautious raise, such as Clinton’s goal of $12 an hour. Only an ambitious raise would live up to a five-year phase-in, and only an ambitious raise would live up to these candidates’ other plans for the economy. A minimum wage of less than $15, for instance, would be disproportionate to Clinton’s plan for middle-class wages—a plan to raise these wages “through profit-sharing, paid sick and family leave, updated overtime-pay rules, fair-scheduling policies, and labor-law enforcement.”

One argument against an ambitious minimum wage proposal is that we don’t have much experience raising the minimum wage in such large increments, and thus don’t quite know what to expect. The closest thing we have to evidence that large increments work is President Truman’s success with raising the minimum wage from 40 cents an hour to 75 cents an hour in 1950.

While we don’t have the statistics to gauge the direct impact of this raise, what we do know is that a significant drop in the unemployment rate occurred in the years following its implementation. Specifically, unemployment fell from 6.6 percent in December 1949 (a month before the raise took effect) to 2.7 percent in December 1952. This drop suggests that Sanders’ proposal is a risk worth taking.

“There is no firm evidence to reject or support raising the minimum wage substantially,” journalist Teresa Tritch explains. “But what evidence there is indicates it is worth a try.”

Wade is a member of the class of 2017.

  • Astromaster35

    It is easy to talk about raising the minimum wage on a national level, but practically its much more complicated in terms of second order effects. Going from $10/hr or $12/hr in high cost states such as Ca or NY to $15 by 2020 or 2022 is likely to be much less disruptive to overall employment growth than going from $7.25 to $15/hr in low-cost states in the South or Midwest for instance. Youth unemployment suffers disproportionately with increases in minimum wage increases, (see: Princeton study in 2003 by Neumark and Wascher). Did you know that the minimum wage in Sydney Australia is almost A$17/hr. Do you know what the impact has been? Well… think about never seeing a cashier in a super market or ordering fast food on a tablet and having the food come out of a slot. The problem about a “living wage” is not really one of minimum wage levels, rather it is one of upscaling talent such that Americans can contribute productively to society in jobs that cannot be outsourced to lower income foreigners or increasingly to machines, which ultimately will constitute the real long term threat to gainful employment… with some estimates already suggesting that almost all service sector jobs paying less than $20/hr will be made redundant by machines within 10 years. Consequently, increasing the minimum wage is a band-aid solution that does not get at the cause of the problem, which is educational attainment and fostering creativity, which fortunately nobody has yet figured out how to program into computers… The net result of a national minimum wage increase to $15/hr across the entire country would be to permanently shift unemployment rates much higher. Instead, consider free and government sponsored job training and skill improvement programs, offered jointly with employers who can apprentice these training workers for future job opportunities.

  • Man with Axe

    Look at the minimum wage increase from the point of view of a small business owner. He’s paying his least productive employees $7.25 per hour (I’ll ignore all the other costs of employing someone, such as FICA taxes). More productive employees have been given raises and some make much more than the minimum. He has to pay them more to keep them from leaving, as they are productive and competitors would like to lure them away.

    The minimum wage goes up to $10. The ones who contribute, say, $8, enough to justify keeping them at $7.25 per hour, are no longer worth keeping, as the $8 is less than their mandated $10 wage. They are laid off. The business might scale down, close earlier, for example, or replace them with machines if feasible.

    Then, when the minimum goes up to $15, suddenly more productive people find these jobs attractive and start competing for them. Retirees who wouldn’t work for $7.25. College students, married women, people with other jobs who now see these jobs as good opportunities for moonlighting. Many of the poor people who used to have the $7.25 jobs are replaced by this better trained, more experienced group.

    So, whom have you helped? Whom have you hurt?

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