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The minimum wage is about the middle class [Commentary]

Restaurant and Catering IndustryJob MarketConsumer Goods IndustriesFood IndustryInflation and Deflation

Fast food workers in more than a hundred cities across the country went on strike for a $15 an hour wage earlier this month. They were calling it a strike for a livable wage. Fast food workers epitomize the low-skilled working poor in America, but a $15 an hour wage is not about poverty. Rather it speaks to their desire to become respected members of the middle class.

Opponents, particularly those in the fast food industry and other low-wage employers, will naturally trot out the standard economic model that such an increase can only lead to lower employment. Because only a small fraction of the labor market earns the minimum wage, the benefits to the poor cannot outweigh the costs of lower employment, especially in a bad economy. Moreover, most minimum wage earners are not primary breadwinners, but are either spouses or teenagers.

All these arguments are wrong. First and foremost, it isn't those who earn the minimum wage but those who earn around the minimum wage — what we will call the "effective" minimum wage, between the statutory minimum and 50 percent of average annual hourly earnings — who count.

Historically, Congress attempted to keep the minimum wage at 50 percent of average annual earnings, but failed.

The average annual hourly earning in 2012 according to the Census Bureau was $21.43. The current minimum wage of $7.25 is only 33.8 percent of the average annual hourly earning and would have to rise to $10.72 to meet the 50 percent goal.

Effective minimum wage earners are those making between $7.25 and $10.72. Who are they? In 2012, 67.6 percent of effective minimum wage workers were between the ages of 25 and 54. Nearly 57 percent of effective minimum wage workers were women, and the percentage of black effective minimum wage workers, at 20.9 percent, was higher than all black workers.

The claim that a hike in the minimum wage will lead to lower employment is simply not borne out by the data. It is possible that a $15 an hour wage might be a tipping point, but an increase to $10.10, as proposed by President Barack Obama recently, is not going to have much of an impact because it will still be far below the market clearing wage, where labor supply equals demand, which probably hovers around the $14.90 median wage.

We know from studies of the fast food industry during the 1990s that the minimum wage did not have adverse employment effects in states where it was raised because the fast food industry is a labor monopsony. That means that they are the primary employer of minimum wage workers and as such employment can actually be expected to rise following an increase in the minimum wage.

The real reason the minimum wage needs to be raised is because its macroeconomic benefits would shore up the middle class. One has to wonder why a law that only affects a limited percentage of the labor market elicits such strong political opposition. The obvious reason is that its benefits are broader than opponents would like you to believe.

Consider that the wage distribution is divided into intervals. The first interval begins with the actual minimum wage and ranges to 25 percent, and second ranges an additional 25 percent, and so on. Data from 1962-2008 shows that when 10 such intervals were created, 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. Because the construction of these 10 intervals accounted for up to 70 percent of the labor force in 2008, the ripple effects from the minimum wage were effectively benefiting the middle class.

Of course, critics will say this causes inflation, but there is a difference between good inflation and bad inflation just as there is a difference between good cholesterol and bad cholesterol. This was clearly the intent of those who designed the minimum wage in the first place because they understood that people with more money to spend would be able to demand more goods and services in the aggregate, and this was what was ultimately going to drive the economy.

The minimum wage as a middle class issue ultimately becomes a foundation for job creation at the grassroots level. As the fast food workers go on strike for wages that appear to be in line with the median hourly wage, we as a society should consider just who these workers are. Those who like to dismiss them as secondary earners are trying to obscure the moral issue here, which is what type of society we would like to be. A society that wants to maintain a strong and viable economy must choose the high road rather than the low road. It must choose policies that benefit the middle class.

Oren Levin-Waldman is professor of public policy at Metropolitan College of New York and is author of Wage Policy, Income Distribution, and Democratic Theory (Routledge 2011). His email is olevin-waldman@metropolitan.edu. ¿

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