Growing the Lower Class

Harold Meyerson has a pair of prescriptions for how to “grow the middle class”. I’m confident that his proposals are very well-intentioned but my hip-shot reaction to them is that they won’t produce the results that he envisions. Here are his proposals:

Recently, though, two proposals have emerged that could boost Americans’ incomes. One — part of an omnibus stimulus measure from Sen. Tom Harkin (D-Iowa) — would raise the minimum wage and index it to the cost of living. The second, laid out in the new book “Why Labor Organizing Should Be a Civil Right,” by Richard Kahlenberg and Moshe Marvit, would extend the employment protections of the Civil Rights Act — which forbids firing workers for reasons of race, gender, age and disability — to workers seeking to join a union.

In discussing his proposals it might be a good idea to define our terms. Class and income are related but not synonymous. My rule-of-thumb definition of class is that if most of your income is derived from hourly earnings, you’re probably lower class. If most of your income is derived from a salary, you’re probably middle class. And, if most of your income is derived from interest, dividends, and rents, you’re probably upper class. There are some income wrinkles in there, too. For example, somebody most of whose income is hourly earning whose total income is above the median but below the top .1% of income earners is probably middle class.

Income levels are something else again. I think that anybody whose family income is from the second quintile to the 99.9th quintile is middle class, a range of, roughly $25,000 to $2 million. Some people would say, more rigidly, that middle income is exclusively one standard deviation below median income and one standard deviation above, a range of roughly $35,000 to $70,000. I think that’s absurd on the grounds that it would declare plumbers, policemen, and teachers who were married and whose wives worked outside the home “upper income”.

Class and income level are too often conflated, IMO. Class means something very different in the UK, France, Germany, and so on than simple income level. Confusing the two does not make communication clearer.

I assume that Mr. Meyerson, like most Americans, means income when he says “class”. Also I should warn you that Mr. Meyerson’s column is chockful of folk Keynesianism, the sort that no sensible economist would be likely to underwrite. More on that later.

What happens when you raise the minimum wage? The simplistic Econ 101 response is that fewer people would be employed at minimum wage, more people would be unemployed, and the incomes of those who remain employed at minimum wage would rise. Basically, the same total payroll would be divvied up among a smaller number of people receiving it.

The studies haven’t entirely borne that out so don’t bother quoting them to me. My explanation of the studies is that the number of minimum wage employees is somewhat inelastic and, consequently, the number of workers receiving minimum wage doesn’t decline as much as you might think it would. But it’s not completely inelastic which means that fewer people would, indeed, be employed. At least legally.

I think these studies have certain deficiencies and I’ll just discuss two of them here. The majority of those working for minimum wage are immigrants. The primary effect of increasing the minimum wage is not that native born Americans get paid more but to attract more immigrants here to work for the minimum wage. That might be all well and good except that it ignores the infrastructure costs which rise on the order of n log n with the population, i.e. faster than linear, not as fast as with the square. What kind of infrastructure costs? Water, sewage, transportation, housing, educating their children, taking care of their health.

To put some numbers behind this consider two married minimum wage workers with two kids. Their total income would be about $30,000 per year. Here in Chicago educating their children would cost about $25,000; their Medicaid costs would be something between $3,000 and $10,000. The money’s got to come from somewhere and, obviously, it can’t be the minimum wage workers. And we haven’t started considering the other infrastructure costs.

The implication of Mr. Meyerson’s “Keynesian” argument is that the additional spending on groceries, rent, cars, clothing, and so on by minimum wage workers (who are not, by definition, middle class) will be enough to create a lot of middle class jobs. That’s patently absurd unless you envision creating a significant number of new minimum wage jobs which is pretty much the opposite of what is likely to happen unless you believe that a significant number of new immigrants will arrive, motivated by the new, higher minimum wage to bolster their numbers and, not coincidentally, failing to pay for their own infrastructure costs.

I don’t think his proposal is one to grow the middle class. I think it’s one to grow the lower class.

The additional shortcoming of the studies is that they don’t take into account employment effects secondary to the increase in minimum wage. For example, some union contracts call for the base pay to be at a multiple of minimum wage. Even if increasing the minimum wage does not reduce the number of employees receiving minimum wage it may reduce the number of those receiving minimum wage multiple wages.

As to his proposal for increasing the power of unions I think that Mr. Meyerson is confusing causes with effects. Higher union wages will not increase total payrolls. They will reduce the number of those receiving the higher wages.

Something else on the minimum wage: consider this table (of unemployment rates by state) and this map (which illustrates which states have their own minimum wage laws). According to my eyeball-o-meter the states with minimum wages above the U. S. minimum wage have higher unemployment than those that don’t even considering adjacent states that are quite similar in topography, economy, and so on. Maybe the difference is more complicated than just the minimum wage but I don’t think that the minimum wage is completely irrelevant, either.

Maybe we should consider a couple of experiments. Why not raise the minimum wage to $20 per hour? If it works as Mr. Meyerson presumes, there will be little or no change in employment and vastly more spending on the part of those earning the minimum wage.

Or, perhaps, we could unleash the power of federalism. Convince Colorado or Washington to incrase their states’ minimum wages to $20 per hour and see what happens. I’m guessing that it won’t result in a tremendous economic boom in those two states.