Minimum Wage and the Middle Class

“Amongst the novel objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of conditions.”

– Alexis De Tocqueville (Democracy in America, 1831)

Americans have always considered themselves “middle class.” Traditionally, that self-identification was embraced by people from just above the poverty line to those near the top 1% of incomes ($350,000 annually.)

The last two decades saw corporate CEO incomes rise from 40 times that of the average worker to 400. Young tech billionaires don’t maintain the low public profiles of earlier super-rich, but instead embark on grand projects (space flight, education, medical research) that were formerly limited to government sponsorship. A voracious media, in its quest for content, does it best to make certain that everyone is a voyeur of lifestyles they can never afford.

In the meantime, technology and global competition continue to erode the middle. When the job of someone making $35,000 a year is eliminated, they don’t just step up to a $50,000 job. In reality, most have to accept something less. The Department of Labor now counts 6,400,000 Americans who are working part time jobs, but say they want full time work. (Working as little as 1 hour a week means you do not count in the most widely published U-2 unemployment statistics.)

As the quadrennial election cycle heats up, a popular solution for income redistribution is to mandate a huge jump in minimum wage. Pay the lowest tier of workers more, the logic goes, and we will have a more stable democracy. Besides, the money will only come from business “profits,” and therefore be relatively painless for the payor.

According to the compensation survey company PayScale, the average small business owner with over ten years in business (a success, by most measures) makes just over $105,000 a year. That isn’t a shabby living, but it’s a long way from being rich; and it includes those profits.

Those small business owners create 65% of the new jobs in this country. Although Obamacare is a more direct tax on employers, minimum wage is similar in that it doesn’t apply if you don’t hire someone. One of the reasons for the huge growth in unwilling part-time employees (up 50% since 2008) is employer avoidance of the requirements for health insurance. It doesn’t take an economist to see the consequences of adding a high minimum wage to the cost of employment.

• If high minimum wages are implemented piecemeal (by city or state)  then there will be some cross-migration. Businesses will select lower-wage areas, while employees will gravitate to places with higher wages.  The assumption of politicians that because a business has bricks and mortar it is stuck in their jurisdiction is erroneous.
• If such a wage is enforced nationally, it’s hard to understand why offshoring to low-labor cost countries wouldn’t accelerate for those businesses that are able to do so. Those that can’t are concentrated in retail, hospitality and personal services — already among the lowest-margin areas of business ownership. So entrepreneurs who make the least money will shoulder the bigger burden.
• Small businesses, typically laggards in adopting technology, will find the return on investment far more appealing. I can see fast food restaurants with touch pads for customers, and one long line for the computer illiterate.
• Those currently making minimum wage will discover, much to their dismay, that between about $17,000 a year and $23,000 a year 85% of their income increase is offset by the loss of Earned Income Tax Credits; leaving them essentially even.
• Starting a small business with employees will have much less financial appeal. Those with entrepreneurial instincts and ambition will recalculate the benefits. That may well lead to fewer bootstrap startups, which are typically a starting place for many minimum wage workers.

Finally, a high minimum wage doesn’t fix the problem. There are jobs, especially in the trades, where employers are happy to pay $15 an hour or more for people with appropriate skills. Paying a sandwich wrapper the same as an electrician’s helper won’t make sandwich wrapping a stepping stone to the middle class.

Here are some of my earlier posts on this topic:

A Tiered Minimum Wage for Small Business (2013)

The Black Donut Hole (2010)

If you like what you read, please pass it along. Comments are always welcomed!