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Addressing Income Inequality through a Credible Wage Policy

By       Message Oren M. Levin-Waldman     Permalink
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Among the issues to surely be front and center as the Presidential campaign swings into full gear is the issue of income inequality and how best to address it. If the Occupy Wall Street movement has accomplished little else, it has surely put the issue on the public agenda. Income inequality is not problematic because it necessarily results in the loss of jobs to the middle class, but because it speaks to the absence of a middle class that is critical to the sustenance of democracy. Unfortunately, the gravity of the situation has been lost because of the standard debate between the political left and the political right.

Those on the left call for higher taxes on the rich as but one means of narrowing the gap between the top and the bottom through a standard redistributive approach, while those on the right call for reducing taxes, deregulation and significant budget cuts in the belief that this will lead to job creation which in turn will benefit the middle class. Neither of these approaches will necessarily benefit the middle class. The latter is simply a return to trickle-down economics, which conceivably could work only if tax cuts were conditional on making actual investments that would create jobs. But we haven't heard that call. And the former, while it may make for good politics and make those in the 99 percent feel better, will not have any real benefits for the middle class. And the reason for this is simple: in order for there to be a decrease in income inequality, the percentage increase of those at the bottom of the distribution must increase at a higher percentage rate relative to those at the top of the distribution.

I want to suggest that there is yet a third approach and that is wage policy. A wage policy is a measure aimed bolstering wages, particularly those at the bottom end of the distribution for the macroeconomic benefit of enabling individuals to demand goods and services. There may be broader effects as well. Critics will claim that wage policy, especially if it assumes the form of as minimum wage will have employment consequences, which is particularly problematic at a time of high unemployment. Moreover, they will claim that it is a minuscule segment of the labor market that actually earns the minimum wage, and therefore it is of no real consequence. Both of these arguments are wrong on the face of it. Data over the years show little evidence of serious employment consequences. An analysis of data over more than forty years shows that the minimum wage may have actually had more benefit to the middle class than commonly supposed. I, for example, found that based on an analysis of census data from 1962-2008 that the minimum wage was actually beneficial for at least up to 70 percent of the wage distribution, which makes it a middle class issue. I created ten wage contours -- wage intervals beginning from the statutory minimum wage up to 25 percent above in each year -- and found that in each year that the minimum wage was increased, the median wage in each contour also rose. In years that there were no increases, median wages throughout remained flat. A statistical regression analysis further showed there to be no adverse employment consequences.

This would suggest that wage policy would benefit the middle class in several ways. First by having positive effects on much of the wage distribution, it would help arrest wage stagnation, which has plagued the nation for more than three decades now. We can only speculate that had middle class wages not been stagnant, their ability to demand goods and services would have been greater, thereby leading to greater growth. In the end this might be one way of generating more jobs. Second, by increasing wages beginning at the bottom, the effect will be to narrow the gap between the top and the bottom. Moreover, policy that has the macroeconomic benefit that allows for more people to have purchasing power may also obviate the need for policies that make up the difference through in-kind assistance. An economy, after all, needs to be built from the bottom-up; not the top-down.

It is supremely ironic, then, that both the Left and the Right, who appear to speak past one another, both share something in common. Both approaches might be said to fall into the broad category of fiscal policy. From a monetary policy standpoint, the Fed continues to maintain low interest rates in the hopes that that too will encourage investment through the low cost of money. At a certain level we need a mixture of both fiscal and monetary policy. Both are important stabilizers. Missing from this mix is a what the late economist Sidney Weintraub almost four decades ago referred to as "incomes policy" or simply wage policy.

Conservative economists like Milton Friedman thought that monetary policy would serve as a means of maintaining wage restraint. While advocating roughly a three percent steady growth in the money supply to maintain stability, it was also assumed that money wages would also be constrained. In short, wages would increase to match productivity (which was roughly rising at three percent per year overall), but faster wage growth would be harder to achieve.

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Weintraub sought to go further with the argument that incomes policy was really the missing stabilizer, and that proponents of both fiscal and monetary policy should actually welcome incomes policy as a supplement to their proposals. His approach didn't leave the constraint of wage growth to chance--there would be tax penalty for further wage increases. Today, the problem is the reverse of the one found in Weintraub's time--too sluggish wage gains, not too rapid gains--but the logic and need for a wage policy still applies.

What we need today is faster wage growth. Although the term incomes policy was often used as a euphemism for wage and salary restraints, an incomes or wage policy for our time should be viewed as an essential ingredient in shoring up the middle class and maintaining economic security through its potential to arrest wage stagnation. And yet, to the extent that it shores up the middle class, it also furthers the ends of democracy. Data on civic participation shows that those in households with higher income are much more likely to participate in civic affairs than those at the bottom of the distribution. But as people move into higher income groups, their likelihood of participation actually increases.

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Oren Levin-Waldman is Professor of Public Policy and Public Administration at Metropolitan College of New York. He is the author of Wage Policy, Income Distribution, and Democratic Theory (Routledge 2011)

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