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President Obama has positioned himself as champion of the middle class. In his State of the Union speech, he declared that it was “our generation’s task” to “reignite the true engine of America’s economic growth-a rising, thriving middle class.” Repeatedly, he has appealed to the middle class as a means of justifying tax increases, rolling back the sequester, or expanding government programs. But how have middle class workers fared since the start of the recession in 2007?
A typical measure of middle class labor market health is the unemployment rate, which currently stands at 7.8 percent. But even for those who are fortunate enough to have jobs, the labor market has exacted a toll on their standards of living. Since 2007, the real median income of American families has dropped by over $5,000 per family, while the BLS reports that the average employed person spends 8.3 hours per day working, up from 7.6 hours per day in 2007. In other words, American employees are working more and earning less.
Meanwhile, median household wealth has dropped. According to the Federal Reserve’s Survey of Consumer Finances, American families have experienced a significant drop in net worth since the start of the crisis. This drop illustrates the lower returns earned on investment income, lower wages, a fall in housing prices, and reductions in ancillary benefits like retirement plans and health insurance since the start of the Great Recession.
For workers at either end of the income distribution, the movements have been even more extreme. Workers in the lowest quintile are far more likely to be working longer hours than their middle quintile counterparts, though wages have held constant. For workers in the highest quintile, income has fallen most drastically, but hours worked have remained approximately the same.
The trade-off between work and hours across income classes demonstrates that despite drifting downward, the unemployment rate obscures the real pain in the American workforce. Despite the recovery beginning in June 2009, Americans in general still feel the malaise of sluggish growth and stagnant wages.
One reason for the persistence of falling wages and rising hours since the Great Recession is the tremendous uncertainty attached to investment decisions. Since firms are uncertain about the future fiscal and regulatory environment, they are more likely to keep cash on hand to combat future shocks. In the past year, fears about the tax changes in Obamacare, the fiscal cliff, the debt ceiling debate, the sequester, and Congress’ continuing resolution to fund itself have caused wide fluctuations in business spending, which in turn has suppressed hiring and wages.
President Obama’s current proposal to raise the minimum wage from $7.25 to $9.00 per hour is ostensibly a move towards pushing real wages up to recoup some of the losses to American workers in the past half-decade. But the proposal will have the opposite effect.
Basic economic theory says that placing a price floor on an item creates a surplus since supply and demand do not line up. The minimum wage is a price floor that keeps the suppliers of labor-employees — and the consumers of labor-businesses — from reaching an equilibrium point with respect to wages. Consequently, the labor market becomes depressed, either leading to higher unemployment or lower wages for those who earn more than the minimum wage.
Economists David Neumark and William Wascher have conducted an extensive review of the empirical studies regarding the impact of the minimum wage. They find overwhelming evidence that raising the minimum wage is bad for workers in general and for least-skilled workers in particular. Given the volatility of wages and hours for the lowest income category of workers over the past few years, more shocks to income would seem to be unwise.
For American workers, the downward trajectory of wages and upward movement of hours needs to reverse course. President Obama and Congress can help move the labor market in the correct direction by beginning to alleviate uncertainty surrounding the business environment. By setting credible policy targets to bring debt and deficits in line, clearing up the unclear rule-making in new regulation, and continuing to help employers find labor in the near term, Congress and the president can help revive the American economy.
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