Amid concerns about rising economic inequality and stagnant wages in the United States, raising the minimum wage is becoming increasingly common at the state and local level, while calls for raising the federal minimum also grow louder. Though economists find that declining real minimum wages (after accounting for inflation) contribute to increased income inequality, it has not been clear whether raising the minimum wage would produce long-term earnings gains for low-income workers. New research by economists Kevin Rinz and John Voorheis at the U.S. Census Bureau, however, uses high-quality linked employer-employee data to find that minimum wage increases do indeed decrease earnings inequality by increasing earnings for those at the bottom of the income ladder without short- or long-term declines in employment, as Econ 101 would predict.
In order to know whether minimum wage increases are a well-targeted remedy for rising inequality and stagnant wage growth, policymakers need to know how earnings respond to those increases, taking into account potential side effects arising over time such as laying off workers or a decrease in hiring rates so that the overall employment rate of low-wage workers declines. Rinz and Voorheis provide evidence addressing this question in their new Equitable Growth working paper, “The distributional effects of minimum wages: Evidence from linked survey and administrative data.” They confirm that raising the minimum wage decreases income inequality, increases earnings growth, and increases family incomes at the bottom of the distribution, using data and methods similar to those used in recent research by economist Arindrajit Dube at the University of Massachusetts Amherst. But their research extends Dube’s analysis by incorporating an administrative source of earnings data into the analysis, which indicates they are driven by true variation in earnings at the bottom of the income distribution.
In order to examine the impact of minimum wage increases over time—such as whether it would lead to diminished hiring of low-income workers—Rinz and Voorheis consider the effects of minimum wage increases on so-called growth-incidence curves, which measure how the dollar values associated with various percentiles of the earnings distribution change over a given period. Considering effects on growth-incidence curves could reveal whether the initial earnings increases experienced by workers at the bottom of the distribution are reversed over time by increases in the likelihood of their spending time unemployed. What the two researchers find instead is that the lowest percentiles of the earnings distribution grow faster year over year when minimum wages rise. Moreover, the magnitude of this growth effect increases when measuring growth over longer periods, extending up to five years. This suggests that the initial earnings effects of minimum wage increases may become greater over time rather than reverse as time passes.
In order to provide some sense of the magnitude of these effects, the authors applied their five-year estimates of the effects of increases to the minimum wage to a hypothetical 37 percent increase. This number mirrors the magnitude of the minimum wage increase that Seattle enacted between 2013 and 2016, using recent periods of economic expansion and contraction as a baseline. The authors argue that this indicates that such an increase would have made the economic growth of the late 1990s somewhat more progressive, rather than the increasing income inequality that we saw, and would have mitigated some of the worst earnings losses of the Great Recession of 2007–2009.
This new research provides strong evidence-based support for the effectiveness of increasing the minimum wage since Rinz and Voorheis’ working paper is able to more directly assesses how minimum wage increases affect the earnings of the workers most directly affected by them, rather than estimating effects by looking at cross-sections of the population in different time periods. This is done by estimating the effects of minimum wage increases on income mobility profiles of the workers effected by minimum wage increases, which measure how so-called within-person income growth varies across the distribution. Within-person income growth follows an individual’s income growth trajectory over time. The fact that higher minimum wages lead the incomes of workers at the lower end of the income distribution to grow faster suggests that particular low-income workers may see their earnings increase. Percentile values, however, are aggregate outcomes and do not necessarily reflect the experience of specific individuals, so most workers at the low end will experience an increase, but not all will.
With robust findings using two earnings-growth concepts—growth-incidence curves and within-person income— Rinz and Voorheis’ income mobility profile estimates indicate that increasing the minimum wage also leads to faster earnings growth for workers who begin at low percentiles of the income distribution. The estimates are largest at the lowest percentiles and grow in magnitude over time. Given the high average rates of earnings growth experienced by people who begin at the bottom of the distribution, this effect represents a meaningful but modest increase in the rate of earnings growth.
Rinz and Voorheis’ working paper is an important contribution to the minimum wage debate. Their estimates directly examine possible downward pressure on earnings growth that could arise from minimum wage increases such as increased time spent out of work. While they do not delineate which particular mechanisms produce the changes in earnings, they do provide some hints as to which mechanisms may be dominant. This pattern could be consistent with reduced employee turnover at businesses, keeping workers on job ladders within their firms and leading to subsequent promotions. The pattern also could be consistent with firms gradually decompressing their wage distributions—increasing the pay of workers who previously earned close to the minimum wage in order to retain relative earnings structure within the firm—following minimum wage increases.
In sum, this new research uses high-quality administrative data with established methods to improve our understanding of how minimum wage increases affect low-income workers who work in jobs that pay at or near the legally established minimum wage. By looking at the effect on workers over time, they are able to show that increasing the minimum wage does not, as some predict, lead to long-term negative consequences for those workers who are affected. This suggests that a higher minimum wage is a useful policy tool to counter rising earnings inequality, especially for those at the low end of the distribution.