Strengthening the middle class

On Thursday, Derek Thompson, an associate editor at the Atlantic, wrote a guest post at Ezra Klein’s blog discussing how to rebuild the middle class.  Below is his list of possible interventions to cure what ails the middle class:

The first category is Weak Intervention. This is the classic laissez-faire approach that says stable taxes and smart, lax regulations are the best way to let private-sector wages grow themselves.

The second category is Income Intervention, using a progressive tax code to take wealth from the top and send it below in the form of tax credits or services.

The third category is Education Intervention, where government actively supports schools, especially at the post-secondary level, by investing in colleges and helping students attend them.

The fourth category is Industrial Intervention, where government backs certain industries implicitly (e.g. with a carbon tax) or explicitly (e.g. with solar energy subsidies).

The classic laissez-faire approach (weak intervention) has been the guiding spirit of economic policy choices since 1980.  While there is no question that we have not achieved the mythical anarcho-capitalism Ayn Rand fans would like, it is hard to deny that the general pattern has been to cut taxes, limit the scope of regulation and supress the bargaining power of workers.  And what has this weak intervention produced?  A post by Derek Thompson where he is worried about the fate of the middle class!

Thompson goes on to note:

Democrats don't want to pull back regulation and tax rates. Republicans don't want to expand our industrial policy into green energy. With income and industrial intervention facing gridlock, it's no wonder Washington is paying serious attention to bucket No. 3: education reform.

Pick your most compelling statistic on poverty, inequality or stagnating wages, present it to a policymaker and regardless of party, they are likely to respond that more education is the answer full stop.  And frankly this isn’t terribly surprising since many politicians often view their own educational background as reflecting on their relative ability, not their relative privilege (the same could probably be said for a Northwestern graduate working at the Atlantic).

There is no question education is important, but it is hardly sufficient for millions of low-wage service workers.  While many of these workers do benefit from additional training and education, most of the benefits of their higher quality service delivery don’t show up in their wages. A few years ago, we released a report on education and wages for early child education workers where we found:

The wages of the shrinking fraction of center-based ECE teachers and administrators with a college degree have risen, slowly beginning in the early 1990s and then more rapidly since the late 1990s. Between 1996-98 and 2001-03, this group's wages climbed from $11.57 to $13.35 per hour.

College graduates in a field where education and training improve the quality of outcomes earning $13.35 per hour. 

So how would I go about strengthening the middle class?

I would certainly push for more education and training, smart industrial policy and a more progressive tax code.  But these interventions by themselves are not sufficient to ensure that the benefits of economic growth show up in people's paychecks.  Low-wage workers need a higher minimum wage.  Working- and middle-class people also need the additional bargaining power that comes from having a union.  As the figure below illustrates, when union density was relatively high and the minimum wage kept pace with productivity growth, everybody benefited from economic growth! 

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