How To Create The New American Middle Class

Create more balance between employees and employers, in seven easy steps.

Source: linkedin.com

Remember the term “social contract?” It’s a term that’s been slowly gaining stream in recent years, but one that’s always been at the front of my mind, especially when it comes to cities. Simply put, our nation has been operating without a social contract now for decades, and that has a lot to do with our political, social and cultural issues today.

The definition of “social contract” will vary, but it usually means there is an implicit agreement between government and institutions and the public. Government and institutions agree to provide certain policies and services that allow people to prosper, and the people agree to, well, not rebel. Seriously, the people will often agree to sacrifice some individual freedom for state and institutional services.

The prosperity that followed World War II in America represented a unique time in our history, in world history, and led to the establishment of a unique American social contract, especially in economic terms. Essentially, with Europe’s economic powers recovering from the Depression and a devastating war, America took on the role of being the world’s economic and political superpower. America helped rebuild Europe. Yet America also led the world in manufacturing and industrial production when other nations could not. That was at the heart of the social contract that was established.

There were many facets to the post-WWII social contract. The G.I. Bill enabled veterans to establish their post-war lives – go to college, get generous terms for mortgages. Federal support for unions, which would’ve been unheard of in the first half of the 20^th century, was especially strong as America became the world’s manufacturer. A happy and plentiful workforce, employed by booming industrial corporations, were supported by unions that ensured their gains. You could also include interstate highway development and the expansion of suburbia as elements of the social contract of the era.

That began to fray in the late ‘60s and early ‘70s. I won’t go into much detail here, but a period that saw political and social upheaval in the U.S., troubling economic issues due to rising energy prices and shortages, rampant inflation and the rise of other nations as they returned to the economic world stage, changed the American calculus.

By the 1980’s a split was becoming evident in the American social class structure. Upper-middle class people, the professional workforce I usually call the “salary class”, got a boost in the changing world. Improving technology heightened their production, and they were able to huge advances in computing technology, finance, medicine and health care, and more. Meanwhile, the lower-middle and middle classes, or what I’ve called the “wage class”, struggled with changes in the automation of manufacturing facilities, as businesses sought to reduce costs and lower prices on goods.

From my perspective, growing up in the 70’s and 80’s in the Midwest, I felt the loss of a social contract, without a new one replacing it.

So here we are today, after a tech boom and bust, a housing bubble that burst, continued economic growth without corresponding wage growth at all levels, and we have a societal dilemma now. Over the years I’ve viewed improving cities as one part of the reimagining of the middle class. I’ve written about this many times over. But now the moment seems to particularly demand it.

I wrote recently about the Economic Innovation Group’s proposed wage subsidy as a way to get our low-wage workforce on a course toward the middle class. But it turns out EIG has far more ideas than just a wage subsidy. They have a larger worker policy program. In EIG’s Agglomerations Substack, they rolled out a seven-point plan designed to strengthen and stabilize all segments of the American workforce. Here they are:

Proposals

· Ban noncompete agreements. In their words: “prohibiting noncompetes would restore bargaining power to workers and improve labor allocation. It would also support the creation of the next generation of innovative firms, expanding both the demand for labor and the supply of talent.”

· Develop portable benefits. Many workers are disincentivized to find new employment because the benefits, particularly for healthcare and retirement, are attached to the position. What if they weren’t? Giving workers that sort of peace of mind could spur entrepreneurship.

· Reform occupational licensing. Making occupational licensing easier or less onerous could also expand employment opportunities, particularly in low- and middle-skill occupations like truck driver, pest control applicator, and cosmetologist.

· Design smoother benefit cliffs. Again in their words: “sudden losses in public assistance from modest earnings increases create high effective marginal tax rates and disincentivize work. Gradually phasing out benefits rather than cutting them off sharply would eliminate penalties on advancement and support upward mobility. A worker should not fear a raise, promotion, or opportunity.”

· Introduce a wage subsidy. I’ve often felt that the next middle-class America is already here, masquerading in working-class clothes. One way to get them to that next level is to introduce something like a subsidy on top of a guaranteed minimum income.

· Modernize unemployment insurance. Once again from EIG: “A modernized UI system would provide more equitable coverage and reduce the negative impact of market fluctuations beyond workers’ control. Expansion of UI to cover sole proprietor employers, contractors, entrepreneurs, and gig workers would also encourage more risk-taking and faster reallocation across industries and worker typologies.”

· Improve immigration policy. For far too long, Americans have had their heads in the sand regarding immigration. Consumers have encouraged low-wage employers to send out the bat signal attracting immigrants to work low-wage jobs, as those consumers continued looking away and kept getting low prices. I’m now living in a metro area that has become the target for the eradication of undocumented immigrants. But who, exactly, will take the jobs left behind? We earnestly need immigration policy reform.

Without a doubt, I like each of these proposals. All could be effective. Each policy hits different parts of the workforce in different ways:

Low-wage workers: Designing smoother benefit cliffs would eliminate the disincentive to work and accept government-supported benefits. A wage subsidy would give low-wage workers a well-deserved raise. An actual immigration policy would provide stability in the low-wage workforce that would benefit employees and employers alike.

Middle-skilled workers: Here’s a list of professions (partial, I’m assuming) that require licensing in the State of Illinois: Architect, Barber, Clinical or Prescribing Psychologist, Clinical or Licensed Professional Counselor, Clinical or Licensed Social Worker, Cosmetologist, Marriage & Family Therapist, Nail Technician, Salon Shop, Pharmacist, Pharmacy Technician, Physician, Professional Engineer, Registered Nurse, or Licensed Practical Nurse. Many of these licensed professions come with education and training that builds licensing and certification into their education; others do not. Having the skillset to perform these tasks, but not the knowledge or experience with licensing, becomes a barrier for middle-skilled workers.

Similarly, modernizing unemployment insurance may serve as one way to ease the transition from one career to another.

Professional workers: Banning noncompete agreements would eliminate an imbalance that employers enjoy over employees today. Portable benefits would give additional freedom and flexibility to workers as well.

I’d add a handful of other policies to consider, too:

o Maternity/paternity leave policy

o Support for childcare

o PTO/Vacation time reform

I like this policy proposal. In many respects it would replicate the post-World War II manufacturing-based economy that relied heavily on unions to negotiate benefits on workers’ behalf. That kind of workforce infrastructure disappeared in the early 1980’s and has never been replaced.

Implementing some combination of these measures would go a long way toward creating worker stability throughout the workforce. It’s easy to see that low-wage workers would get immediate raises; it would incentivize non-working people to take on jobs; and it could offer a path to citizenship. For middle-skilled workers, a reduction in licensing barriers may result in new employment and entrepreneurship opportunities. Professional workers could begin to enjoy a greater sense of job mobility than they’ve experienced in decades.

Here’s a thought. Perhaps the Reagan Revolution of the 1980’s went too far in getting rid of the de facto worker policy that ruled the American economy following World War II. It did not have a replacement ready. Unions were seen as the key factor behind high prices in so many American products, and technology and automation was already reducing the workforce.

If anyone gave any thought to where displaced manufacturing workers would go, perhaps they thought the growing service sector would employ them. Unfortunately, jobs in retail, food service, hospitality and similar fields didn’t appeal to former assembly-line workers. I don’t think it’s any coincidence that America saw a surge in immigration in the ‘80s and ‘90s as those service jobs went unfilled.

Maybe America stumbled into the post-WWII social contract that spurred exceptional economic growth for so long. It ran its course, and then we stumbled into another 40-year period that led to deepened economic and social inequality. Let’s be intentional.