Why Raising The Minimum Wage Probably Won't Fix Income Inequality

New research shows minimum wage decreases aren't a huge reason inequality has grown since the 1980s.
Michael Tercha/Chicago Tribune

Does raising the minimum wage decrease income inequality?

On its face, the answer seems like a fairly straightforward yes. If a huge chunk of people at the bottom of the income distribution are making more money, they are getting closer (however slightly) to those above them.

The issue is not quite that straightforward, though. A new paper finds that a declining minimum wage throughout the 1980s was likely not the primary reason that the income of poor people moved farther away from that of the wealthy.

That means raising the minimum wage is likely not the solution to reducing inequality, though it very well might be helpful to that bottom rung of workers. America could need a higher minimum wage for the poorest workers, while also needing a different -- and likely much more difficult -- solution to income inequality for everyone in the 99 percent.

The paper, published in The American Economic Journal: Applied Economics, finds that the effect of the minimum wage on income inequality is smaller than economists have thought in the past -- which is not to say it has no effect. Specifically, the authors looked at vastly increased income inequality in the 1980s and asked whether a decreasing real minimum wage (meaning it was growing slower than inflation) helped increase that inequality.

The paper (you can read an ungated, earlier version here) says that the effect of a wage floor on income inequality is "economically consequential but substantially smaller than that reported" in previous economic literature.

Why is this important? Both income inequality and the minimum wage have become hot-button political issues in recent years, particularly since the rise of the Fight for $15 campaign and the release of Thomas Piketty's tome Capital in the 21st Century. Democratic presidential hopefuls Hillary Clinton and Bernie Sanders (I-Vt) talk about income inequality as a major economic problem and advocate for raising the minimum wage as one possible solution for the issue.

The exact cause of income inequality is up for debate. But many people, including Piketty, think it has to do with the returns that the already wealthy see on their holdings, causing the rich to see more and more wealth every year, even as incomes don’t budge.

This paper provides some evidence for separating the two issues. It's possible that those on the lowest rung on the income ladder deserve more, and we need to create a more equal income distribution for the rest of the 90 or so percent of wage earners in the U.S. But according to this research, those are mostly separate issues with separate solutions.

Thomas Piketty/Capital in the Twenty-First Century

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