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The contribution of the minimum wage to U.S. wage inequality over three decades: a reassessment

  • David H. Autor
  • Alan Manning
  • Christopher L. Smith

We reassess the effect of state and federal minimum wages on U.S. earnings inequality, attending to two issues that appear to bias earlier work: violation of the assumed independence of state wage levels and state wage dispersion, and errors-in-variables that inflate impact estimates via an analogue of the well known division bias problem. We find that erosion of the real minimum wage raises inequality in the lower tail of the wage distribution (the 50/10 wage ratio), but the impacts are typically less than half as large as those reported in the literature and are almost negligible for males. Nevertheless, the estimated effects of the minimum wage on points of the wage distribution extend to wage percentiles where the minimum is nominally non-binding, implying spillovers. We structurally estimate these spillovers and show that their relative importance grows as the nominal minimum wage becomes less binding. Subsequent analysis underscores, however, that spillovers and measurement error (absent spillovers) have similar implications for the effect of the minimum on the shape of the lower tail of the measured wage distribution. With available precision, we cannot reject the hypothesis that estimated spillovers to non-binding percentiles are due to reporting artifacts. Accepting this null, the implied effect of the minimum wage on the actual wage distribution is smaller than the effect of the minimum wage on the measured wage distribution.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2010-60.

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Date of creation: 2010
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Handle: RePEc:fip:fedgfe:2010-60
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  1. repec:cbo:report:44995 is not listed on IDEAS
  2. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  3. John DiNardo & Nicole M. Fortin & Thomas Lemieux, 1995. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," NBER Working Papers 5093, National Bureau of Economic Research, Inc.
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  8. Dube, Arindrajit & Giuliano, Laura & Leonard, Jonathan, 2015. "Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior," IZA Discussion Papers 9149, Institute for the Study of Labor (IZA).
  9. Coen N. Teulings, 2003. "The contribution of minimum wages to increasing wage inequality," Economic Journal, Royal Economic Society, vol. 113(490), pages 801-833, October.
  10. Victor Chernozhukov & Christian Hansen, 2005. "An IV Model of Quantile Treatment Effects," Econometrica, Econometric Society, vol. 73(1), pages 245-261, 01.
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  12. David Neumark & JM Salas & William Wascher, 2014. "More on recent evidence on the effects of minimum wages in the United States," IZA Journal of Labor Policy, Springer, vol. 3(1), pages 1-26, December.
  13. Congressional Budget Office, 2014. "The Effects of a Minimum-Wage Increase on Employment and Family Income," Reports 44995, Congressional Budget Office.
  14. Allegretto, Sylvia & Dube, Arindrajit & Reich, Michael, 2010. "Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data," Institute for Research on Labor and Employment, Working Paper Series qt7jq2q3j8, Institute of Industrial Relations, UC Berkeley.
  15. Alan B. Krueger & David Card, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply," American Economic Review, American Economic Association, vol. 90(5), pages 1397-1420, December.
  16. Congressional Budget Office, 2014. "The Effects of a Minimum-Wage Increase on Employment and Family Income," Reports 44995, Congressional Budget Office.
  17. Teulings, Coen N, 2000. "Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 359-98, May.
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