Raising the minimum wage doesn’t reduce income inequality – economic growth does

If income inequality is a problem – and there’s no consensus that it is (see here and here) – economic growth is the best way to reduce the disparities.

Scott Winship, whose work on this issue has been outstanding, writes at e21:

… it is the fragility of the economy that lies behind concerns over inequality. Inequality was high and rising during the late 1990s, but because the growing economy was largely benefitting everyone, few people were worried about income concentration at the top.

A growing economy fuels optimism and achievement. Stagnation breeds insecurity and pessimism. Winship identifies the primary, not new, challenge.

While upward mobility has not diminished over time, and while it has not been hurt by rising income inequality, it has nevertheless been stuck at unacceptably low levels for decades. If past patterns hold, 70 percent of poor children today will fail to make it to the middle class as adults. Four in ten will be mired in poverty themselves in midlife.

Education, workforce training and stable families are part of the solution. An increase in the minimum wage does little to reduce the income disparity. By increasing unemployment for the least skilled workers, it contributes to the lack of mobility.

As J.D. Foster, economist with the U.S. Chamber of Commerce, points out:

The minimum wage debate is misplaced as part of the income inequality debate simply because raising the minimum wage by $1 an hour, for example, adds about $2,000 to the pre-tax income of those few full-time minimum wage adult workers. (Most minimum wage earners are either teenagers or are working part-time). A $2,000 increase would make a difference to the worker, assuming he or she still has a job, but it doesn’t do much for income inequality…

Abby McCloskey of the American Enterprise Institute looks at who the wage hike might help.

According to the Bureau of Labor Statistics, over half of minimum-wage workers are under the age of 25, and nearly 75 percent are working part-time or have varying hours. Consensus among economists is that 20 to 25 percent of minimum-wage earners are at or below the poverty line. This means that minimum-wage increases are far more likely to benefit a middle-class teenager working a part-time job than a full-time family breadwinner in poverty.

Yet in some circles, the argument persists that the minimum wage in Washington, already the nation’s highest, should increase. In Seattle, the drive for a $15 minimum continues.  Seattle Times business columnist Jon Talton notes that the jobs recovery in Washington continues to fall short of the pre-recession peak. Talton, in his post on the $15 minimum, writes,

Much research has found that at least modest increases in the minimum have no discernible effect on employment (for an example, see here).

The linked example goes to a report by liberal economist John Schmitt. I prefer the definitive research by  David Neumark and William L. Wascher, which concludes:

…the oft-stated assertion that recent research fails to support the conclusion that the minimum wage reduces employment of low-skilled workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.

And, not to belabor the obvious, regardless of the supposedly benign effect of a modest increase in the minimum wage, the bump to $15 is far from modest. For that matter, neither is the 27 percent increase represented by a $2.50 increase, the top end of the governor’s suggestion.

The minimum wage proposals have much more to do with politics than economics, but the economic consequences will be negative and real should they go into effect. Far better to focus on policies that will spur economic growth and increase opportunities.

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