THE BLOG
10/13/2014 08:24 am ET Updated Dec 13, 2014

Do Minimum Wage Increases Benefit the Middle Class?

ASSOCIATED PRESS

Seattle is among a modest but growing number of major U.S. cities committed to raising its minimum wage well above national and state standards. If its planned trajectory holds, Seattle will boast a $15 minimum wage in 2018. Observers are wondering what happens if Seattle's initiative goes viral in U.S. metropolitan areas? Will minimum wage increases implemented in leading urban areas benefit the American middle-class as well as the working class?

According to Nick Hanauer, plutocrat-patrician extraordinaire, corporate management tends to believe that wage increases for workers are detrimental to company profits. As businesses with unionized workers have learned, it can be difficult in an age of global trade to raise prices as an offset to wage increases, especially with bounded consumer spending capacity and the availability of lower quality but useable substitutionary items. Consequently, management often pushes back against calls for wage increases.

Do many corporate executives mistakenly assume that profits can advance endlessly while consumers' financial condition stagnates? Does the executive mindset suggest an evolving "tragedy of the commons," with middle and working classes serving as an "over-grazed pasture," as in an exploited commons? If so, might minimum wage increases be useful if implemented carefully as part of a larger, balanced plan for mitigating excess economic inequality?

The Great Society and the Minimum Wage

There is no simple way to anticipate the various impacts of worker wage increases in a globally complex interdependent economy. Probable effects are variable across industries, business models, competitive environments, disparate national circumstances, and sunk cost contexts -- a point that government analyses often overlook. What we do know is that a local minimum wage increase is a different animal than a national increase.

Parts of the country with metropolitan areas that currently employ many workers at wages near the allowable minimum will likely find the competitiveness of their businesses diminished relative to higher wage portions of the country once the lower wage areas raise their minimum wage. Areas of geographic economic weakness in the U.S. might become weaker still relative to more prosperous parts of the country, thus undercutting LBJ's vision of a "Great Society" with semi-homogenous prosperity. This important observation is often overlooked, with more attention given to the impact of minimum wage increases on the global competitiveness of U.S. businesses.

There are countless ways to calculate (or spin) the probable benefits and costs of raising the national minimum wage by a substantial amount. Those who have studied the debate (including economists, social scientists and entrepreneurs) realize that potential unanticipated consequences are numerous. Careful reflection suggests the need for balanced remedies, where minimum wage increases are packaged with other economic reforms and structural realignments. This is not to argue against minimum wage increases as much as to argue that this remedy must not be substituted for reforms at deeper levels.

Middle Tier Productivity Incentives

What happens when the minimum wage closes in on the median or average wage in a given business sector? This is an important question. During the last several years American businesses have hired hundreds of thousands of workers who would not be employed were it not for the macro-economic effects of the Fed's easy money policies. In many low-end retail establishments one sees checkout clerks, shelf stockers and other personnel working at about half the pace and productivity of their nearby peers. Some of these low productivity workers keep their jobs only because a modest minimum wage allows employers to ramp up productivity or service capacity in defense of market share. If a minimum wage increases causes the wage gap between efficient workers and lackluster workers to collapse, a personnel crisis can result. The crisis may reflect a tearing of the fabric of sensed remuneration justice within the organization, or it may serve to undermine the tractability, enthusiasm and productivity of better workers. In the long-run, a company may have little choice but to provide across-the-board wage increases to maintain wage differentials between bottom productivity tiers and more efficient groups above.

While the impact of such increases will vary across sectors, regions and competitive situations, the likely aggregate effect is wage-push inflation, unless a good portion of historically high corporate profitability is used to pay for the worker wage increases (thus holding steady the prices of goods and services rather than raising them to offset wage increases). Granted, the corporate hierarchy will not compromise its compensation differential except by the force of law, tax policy mandates, loss of profitability or the reformation of asset market operations.

Theoretically, a wealth transfer from elites to workers cools off the stock market. A cooler stock market diminishes asset-appreciation spillover into the general economy, thus buffering whatever inflationary pressures are generated by the increased consumer spending that higher wages bring. The economically attractive part of this type of wealth transfer is that increased consumer spending shores up corporate revenues, thus supporting corporate profits by means of improved sales volume. This virtuous cycle cannot be attained without regulatory guidance to corporations concerning the proper utilization of high profits on behalf of the sustainable public interest.

In short, corporate boards need guidance and guardrails that limits their ability to use profits for stock buybacks that disproportionately benefit the executive suite and mega-shareholders. As of late, corporations have justified buybacks by claiming investors' funds will go elsewhere if a given corporation does not rise to the challenge of buying back stock as aggressively as other corporations in the sector. "You're got to keep dancing," is the refrain. A similarly contrived excuse is used for jacking up the compensation of corporate executives. This type of injustice will not be contained until ethical boundaries (with regulatory teeth) are applied to corporate compensation behaviors.

Why the Middle Class Takes the Hit

As it regards the consequences of wage-push inflation, a major problem for the American middle class is that they consume a disproportionate amount of whatever modestly priced goods and services exist in the nation. Households in the top 5 percent of the income distribution spectrum (i.e., above $186,000 in 2011 and around $200,000 now), often purchase goods and services from companies able to pay superior wages. Meanwhile, households in the bottom 40% of income distribution (with merely 11.6% of the nation's spending power), have but a relatively light impact on the total consumption picture. Consequently, when minimum wage increases generate wage-push inflation in the category of relatively cheap consumer goods and services, it is the middle-class that finds their purchasing power and lifestyle prospects eroded most significantly.

Working class people who receive substantial minimum wage increases obtain a buffer against the higher prices. Likewise, high income earners are not much impacted by higher prices and are buying goods and services not provided by minimum wage workers. It is the middle class that remains vulnerable. If middle class incomes are raised to offset this vulnerability, the cost of living goes up for everyone, assuming no large productivity or business efficiency gains as an offset. Consequently, the best solution is to redesign the way asset markets distribute capital so that the middle class picks up the increased wealth that the top 3 percent have increasingly harvested. Instead of raising middle class wages, increase the middle class's ownership share of the national capital stock, something that some thoughtful observers call "capital homesteading."

Admittedly, abysmally low worker-wages in countries like Mexico have greatly limited the prospect of wage push CPI inflation in the United States, giving the Federal Reserve cover to service Wall Street's easy money demands. Nonetheless, if one is concerned about excessive income inequality and basic human dignity, it seems less than honorable to accept inhumanly low wages in an adjacent country as the brake on wage inflation in one's own country. This is why global standards on behalf of human dignity are necessary, including powerful incentives for all countries to contain their population growth by rewarding prudent family planning.

Conclusion

In sum, the enhancement of minimum wage protections is one important spoke in the wheel of economic justice. But one-spoked wheels don't roll very far. Thoughtful plans for combating income and wealth inequality gaps must incorporate many reforms. Additional 'spokes' in a new wheel of economic wisdom include improvements in the fitness of educational endeavors, entertainment products that educate while they humor, better avoidance of wasteful enterprise (including low-gain healthcare), and far-seeing refinements to the Earned Income Tax Credit (EITC). Other needed reforms include an improved vision for the constructive deployment of capital, incentives for prudent business efficiencies, and policies that reward businesses for distributing profits with a less elitist view of deservedness and merit. Each of these reform agendas needs thoughtful inclusion in the national policy conversation.