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The Minimum Wage as an Anti-Inequality Policy

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Written by John Schmitt   
Thursday, 06 September 2012 09:00

I am a big fan of the kind of journalistic exercise that David Leonhardt recently launched at the New York Times Economix blog. He has decided to take a long, detailed look, in multiple installments, at “The 14 Potential Causes of the Income Slump.” Yesterday, Leonhardt had a long post in this series with the headline “Why the Minimum Wage Doesn't Explain Stagnant Wages.”

I largely agree with Leonhardt's conclusion as stated: “If you’re trying to understand why every income group except for the affluent has taken an income cut over the last decade, you probably shouldn’t put the minimum wage at the top of your list of causes.”

But, I worry that much of the piece will give readers the wrong impression about the minimum wage as a policy to fight inequality.

(1) That the minimum wage is not *at the top* of the list for explaining inequality does not mean that it is not an *important* determinant of inequality.

The minimum wage is just one of a constellation of policies that have pushed inequality up over the last three decades --high unemployment (not just the Great Recession, but most of the last 30 years excluding 1996 to 2000), declining unionization rates, pro-corporate trade deals, deregulation of many previously well-paying industries, privatization of many state-and-local government jobs, a dysfunctional immigration system, poor enforcement of existing labor laws, and others. The common thread running through all of these policies is that they have all served to undermine the bargaining power of workers relative to their employers. Different policies have had effects on different parts of the workforce (by wage level or race or gender) at different times. But, they have uniformly acted to pull the bottom out of the labor market.

Given all these forces pushing in the same direction, it would be odd that the minimum wage was at the top of the list.

(2) As Leonhardt argues, the minimum wage has likely had less effect on rising inequality in the 1990s and 2000s than it did in the 1980s. But, he gets the reasoning for the declining importance wrong.

Leonhardt writes: “The crucial point is that the minimum wage has risen, even after adjusting for inflation, over the last 20 years.” But, the real issue is that the minimum wage has been so low for so long that it is far less relevant now to the wages that most workers earn. According to data in an academic paper cited by Leonhardt (Autor, Manning, and Smith, 2010), in the 1980s, an average of about 6 percent of workers earned at or below the minimum wage (falling from about 9 percent in 1981 to about 4 percent in 1989); in the 1990s, the average was only just over 4 percent; in the 2000s, just under 4 percent (including a boost after the increases in the federal minimum wage in 2007, 2008, and 2009).

The minimum wage hasn't contributed as much to rising inequality recently because it is too low to matter, even for many low-wage workers.

(3) Just because the minimum wage has not contributed as much to recent growth in inequality does not mean that raising the minimum wage would not help to lower wage inequality going forward.

Leonhardt makes this point, but not loudly enough. Imagine for a moment that the minimum wage today were only $2 per hour. At that level, only a tiny fraction of workers would be at or near the minimum wage. If we then cut the minimum wage to just $1 per hour, we'd likely see no measurable impact on wage inequality. (This is an exaggerated version of what happened in the 1990s and the 2000s. After the big drop in the value of the minimum wage in the 1980s, a new low level of the minimum wage was all but locked in.) Nevertheless, if we went ahead and increased the minimum wage to $10 per hour (allowing for an appropriate phased-in period), we would still likely see a substantial decrease in wage inequality at the bottom of the labor market --even though the minimum wage would not have contributed much to increases in inequality in the run-up to the new increase.

What we really want to know is not how much the declining minimum wage contributed to increasing inequality in the recent past, but, rather, how much will raising the minimum wage from its current level help to reduce inequality. For that, we need to know how many workers would be affected by any given increase and by how much. A recent analysis by Doug Hall and David Cooper of the Economic Policy Institute of a proposal to raise the federal minimum wage to $9.80 per hour (from its current level of $7.25) found that about 28 million workers would see a wage increase, worth collectively about $40 billion.

Raising the minimum wage going forward could make an important dent in inequality, even if its role in driving ever higher inequality has diminished in recent years.

(4) By extension, the minimum wage could have been a significant brake on rising inequality over the last two decades if it had been set higher over that period.

From the end of World War II until 1968, the inflation-adjusted value of the minimum wage kept pace with increases in the average productivity level of the U.S. economy (see Figure 2 in this CEPR Issue Brief (pdf) from earlier this year). From 1968 forward, and especially after 1980, the minimum wage started to fall badly behind average productivity growth.

If the federal minimum wage had kept pace with productivity from 1968 through 2012, it would currently stand at $21.72, three times its current level. Even if the minimum wage had only kept pace with half of productivity gains, it would be $15.34 today, double its current level. At these kinds of levels --which would have been phased in gradually with productivity growth each year-- it is hard to imagine that the trajectory of wage inequality would not have been substantially different over the last three decades.

(If you think that it doesn't make sense for low-wage workers to share in average productivity gains, we need to have a separate, much longer, conversation. In the meantime, I'll just say two things. First, low-wage workers did share in average productivity gains for about 20 prosperous years after the end of World War II. Second, if you believe that low-wage workers shouldn't share in average productivity gains, then, as my colleague Dean Baker argues, you are accepting that inequality will inevitably worsen over time.)

(5) To my reading, the research by Autor, Manning, and Smith (AMS), which partially informs Leonhardt's conclusions, is more positive about the minimum wage than Leonhardt's post is.

The three economists did their research in response to earlier writing by economist David Lee (also cited by Leonhardt) and others, who found very large impacts of the minimum wage on economic inequality. AMS summarize their own findings by noting: "In net, these estimates indicate a substantially smaller role for the U.S. minimum in the rise of inequality than suggested by earlier work (which attributed 85% to 110% of this rise to the falling minimum)."

The earlier frame of reference for the role of the minimum wage attributed essentially all of the increase in wage inequality at the bottom to the minimum wage, allowing no role for other factors --unions, trade, unemployment, and so on.

AMS, instead, find a smaller, but still meaningful contribution for the minimum wage: "We estimate that 35‐55% of the growth of lower tail inequality in the female wage distribution between 1979 and 1988, 35% to 45% of the growth of pooled gender inequality, and approximately 15% of the growth of male inequality—as measured by the differential between the log of the 50th and 10th percentiles—is attributable to the decline in the real value of the minimum wage. Similarly, calculations indicate that the declining minimum wage made only a modest contribution to growing lower tail inequality between 1988 and 2009 as well."

The effects AMS find are smaller for men than for women, and smaller for recent times than the 1980s, but they still believe that the minimum wage makes a “modest” (relative to 85 to 110 percent) contribution to wage inequality even today.

The minimum wage is not a panacea, but it is an important step in the right direction. Readers of Leonhardt's piece, unfortunately, might get a different impression.

Tags: inequality | minimum wage

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