A minimum-wage hike we can all embrace

Back in the 1970s, 25 percent of the American workforce counted on a union card to guarantee their household a place in the middle class. Blame technology, globalization or even the oil embargo, but union membership has declined as the service economy evolved. Now, standing between American households and a middle class lifestyle is a college diploma, yet only 30 percent of 25- to 34-year-olds have a bachelor's degree.

The knowledge economy ushered in income bifurcation. Those with scarce skills command high wages, while low-skill labor is mechanized or outsourced, effectively erasing the middle class. Politicians tried "spending equality" to solve the problem, offering easy credit to buy middle class wares. That ended in 2008.

McDonald's french fries being prepared.
Daniel Acker | Bloomberg | Getty Images
McDonald's french fries being prepared.

In an effort to shore up income inequality, the White House proposed raising the minimum wage to $9 from $7.25, indexing it to inflation thereafter, affecting approximately 15 million workers in 49 states. Historically, the "living wage" debate has hinged on the left arguing that minimum-wage hikes increase economic growth by shifting capital from corporations to low-income households while conservatives counter that raising the minimum wage results in job cuts.

Fast-food workers went on strike several weeks ago, demanding a $15 minimum wage. While it's naïve to believe that doubling the minimum wage would solve income inequality, it may be time to raise wages while cutting government incentives keeping would-be workers out of the job market.

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Bankrate.com found that 76 percent of Americans are living paycheck-to-paycheck, suggesting the incremental income would be recycled back into the economy, not hoarded. The Federal Reserve Bank of Chicago found that raising the minimum wage by one dollar per hour would increase affected family spending by $800, even though quarterly incomes would only rise by about $300.

Jobs in fast food, hotel housekeeping and other service professions cannot be outsourced or easily automated. Our BMO Private Bank research found that McDonald's has fewer stores per capita in 6 of the 10 highest minimum wage states than it does in the states observing the federal minimum. The inescapable truth is that mandated wage increases would probably adversely affect employment rolls. Double the minimum wage, and suddenly robots make your double cheeseburger.

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Nevertheless, moving to a $9 hourly rate offers added benefits of work; especially if government transfers are slimmed at the same time. A reduction in dependence on unemployment, food stamps, Medicaid and other benefits while earning a "living wage" seems something that both major political parties can rally behind.

The biggest beneficiaries of programs like SNAP (food stamps) and the earned income tax credit are not low-income earners, but the shareholders of companies who employ most of the minimum wage workforce, letting Uncle Sam pick up the difference between minimum wage and living wage. There are 47 million SNAP recipients receiving $132 per person in monthly subsidies. That's up from 26 million people receiving $97 in 2006. A lot of this supplemental income funnels back to those very companies as revenue.

While corporate welfare recipients would bear the cost of the policy change, higher wages would aid employee retention, reducing the need to constantly recruit, hire and retrain replacements.

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Importantly, indexing the federal minimum wage to inflation is a bad lesson learned from the 1970s when CPI escalators were built into union wage contracts. So, for the time being, a better solution is to increase wages for the able bodied that want to work that effectively shifts income support away from the public sector and back to the marketplace. It would also increase the pool of eligible workers right now and appeal to a broad swath of the political spectrum. The time has come.

— By Jack Ablin

Jack Ablin is chief investment officer at BMO Private Bank. Follow him on Twitter @j_ablin.