Growing income inequality and the minimum wage

The Obama administration has voiced concern recently about the rising income gap between rich and poor in the United States and has called on Congress to pass minimum wage legislation to help mitigate the problem. Raising the minimum wage is considered by many, particularly among congressional Democrats, to be a key policy tool to reduce income inequality. Currently, Congress has set the federal minimum wage at $7.25 per hour, which covers most employed individuals. All but five states set their own minimum wages, and 21 states plus the District of Columbia have set their minimum wages higher than the federal rate. Ten of these stats tie their minimum wage to a cost-of-living index, which all but one adjust at the beginning of each year. Starting January 1, 2014, nine of the ten states raised their minimum wages accordingly. Employees in the remaining 29 states are subject to the minimum wage equal to the federal minimum-wage law. The Obama administration announced in November 2013 that the president will back a Democratic-sponsored bill by Senators Hart and Miller to raise the minimum wage to $10.10 per hour. That would be nearly one dollar per hour more than the highest state minimum wages, which is currently set by the state of Washington at $9.32 per hour. The bill would also tie future increases to a cost-of-living index, something that so far has never been done.

Democrats supporting the bill point out that if the minimum wage had kept pace with inflation since its high in the late 1960s, it would now be above $10. There is little doubt that an increase of this magnitude, or any increase at all, would be opposed by Republican lawmakers. They traditionally have seen hikes in the minimum wage as eliminating jobs and retarding employment growth. However, a recent study analyzing scores of published studies on the minimum wage concludes that the negative effects on employment resulting from increases in the minimum wage that are being considered are too small to be statistically detectable.*

Some states, however, are beginning to take the lead in raising the minimum wage. In addition to the states that have automatic cost-of-living adjustments, legislatures in four states (Connecticut, New York, New Jersey, and Rhode Island) voted to raise their respective minimum wages by as much as a dollar. Lawmakers, mostly Democrats, in at least 30 other states are sponsoring or are expected to introduce minimum-wage bills. Growing interest at the state level in shoring up low-wage incomes through minimum-wage increases could put pressure on Congress to pass some form of minimum-wage legislation this year. At this point, none of the state increases matches the current rate introduced in the Hart-Miller proposal before Congress. If Congress did decide to raise the federal minimum wage to $10.10 per hour, it is estimated that more than 30 million workers would receive a raise, potentially offering broad-based support among the general electorate. It is more likely that if federal legislation is passed, the minimum-wage increase would be less than the current proposal.

* Dale Belman and Paul Wolfson, What Does the Minimum Wage Do? Upjohn Institute Press (2014)