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Hiking minimum wage reduces income gap
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Income inequality began to widen in the US in the late 1970s, and the trend spread to Europe by the late 1980s, affecting even countries with long egalitarian traditions by the start of the new century.
The fact that widening income inequality is a common feature of developed economies suggests common causes that are still not well understood.
Income can be measured in two ways: market income before taxes and transfer payments, and disposable income after taxes and transfer payments.
Surprisingly, inequality of market income before taxes and transfer payments in the US is similar to that in many other developed countries, including those with egalitarian reputations like Sweden and Norway. Britain and even Germany have higher inequality of income before taxes and transfers than the US.
Among developed countries, the US does have the most unequal distribution of disposable income after taxes and transfer payments.
That is not because the US has the least progressive tax system; indeed, its tax system is considerably more progressive than those of most European countries, Canada, and Australia, all of which rely on regressive value-added taxes as an important source of revenue.
Least generous
But, among developed countries, the US has the least generous and progressive transfer system. The US spends a much smaller share of GDP on family-assistance programs — including cash transfers, tax breaks, and direct government services — than its developed-country counterparts.
Over the last 30 years, US economic policy aggravated rather than ameliorated income inequality. Both taxes and transfers became less progressive as market-income inequality widened.
The US needs a more progressive and redistributive tax and transfer system to combat rising inequality in market incomes. But this is unlikely, at least in the near term. Republicans are implacably opposed to increases in social welfare programs and higher taxes on the wealthy to finance them.
To combat market-income inequality, the US also needs faster economic growth to boost the pace of job creation and reduce unemployment.
About 4 million workers have dropped out of the labor force since the Great Recession began. Roughly 8 million are working part time, because they cannot find a full-time position. Prolonged labor market slack means falling real wages for most workers. The result is greater market-income inequality.
Lower wages
Adjusted for inflation, today’s federal minimum wage of US$7.25 per hour is 23 percent lower than it was in 1968. If it had kept up with inflation and with average productivity growth, it would be US$25 per hour. At the current minimum wage, a worker employed full time for a full year earns only US$15,080 — 19 percent below the poverty line for a family of three.
According to the OECD, the US has the second-highest relative poverty rate (the share of the population that earns less than half of the national median income) among developed countries.
Recent research suggests that an increase in the minimum wage would have a powerful positive effect, with a 10 percent increase cutting the poverty rate by 2 percent.
Indeed, about 30 million workers would benefit from an increase in the minimum wage to US$10.10 per hour.
Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Copyright: Project Syndicate, 2013. www.project-syndicate.org. Shanghai Daily condensed the article.
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