There has been a lot of talk recently about the gap between the wealthiest Americans and the poorest Americans. If you listen to our President and Democratic candidates, it’s the biggest problem facing America. That is why, according to them, it is so important that we increase the minimum wage. But does increasing the minimum wage accomplish this objective? Is there a policy that does? Is this really the problem, or is it just some focus group tested rhetoric that polls well with Democratic voters?
To find out I ran some numbers on my own. It has been widely reported that the top
1% of Americans makes in excess of $300,000 per year. With that as our starting point, the proposal to increase the minimum wage from $7.25 to $10.10 would decrease the income gap by 2% (change in gap/gap). That’s not a noticeable enough dent to merit an increase on this issue alone. In fact if we increase the minimum wage to 15 bucks an hour as many progressives have called for, the decrease is still a mere 5 1/2%. So clearly increasing the minimum wage in-line with proposed legislation does not decrease the income gap in a meaningful way.
On the other side of the coin, there is a policy that dramatically decreases the income gap. If we cap incomes at 200K or institute a 100% tax rate for every dollar earned over 200k, we can decrease the income gap by 35%. Decrease the income ceiling to $100K and the income gap drops 70%. Clearly this accomplishes the stated objective, but no one in their right mind wants to see this sort of policy instituted. It would destroy aspirational productivity and decimate our tax base.
So if moving the bottom – i.e. increasing minimum wages – does not affect the income gap, and moving the top – i.e. capping wages – isn’t something even progressives want to do, then clearly the gap is not the problem. As long as we are lucky and our entrepreneurial spirit is in tact, people will always figure out how to make more money which increases the size of the pie and increases potential tax revenue so the top earners are not the problem.
The real problem is just poverty. People in poverty need options to move up and away from the bottom. They need better education and training. They need options when their schools are not meeting their needs. They also need jobs, and our neighbor states offer great lessons in how to create them – reduce costs, and reduce corporate tax rates (not sweetheart deals), and create a pro-business and pro-hiring environment. Growing companies need people. They also need a government that is more focused on job training than on welfare.
The minimum wage is going up. Some people will make a little more money and some companies will hire less. But it won’t affect the income gap, nor will it lead to people currently making minimum wage to making more than minimum wage. They will still be minimum wage workers.
So although the income gap is a convenient and emotionally satisfying rallying cry for the left, it obscures the real issue which is not that rich people make too much money, but that the poorest Americans – generally urban blacks – lack the opportunities and options to better their situation. Let’s get this minimum wage thing behind us so we can focus on the problems that really matter like public schools and job growth.
A Card Carrying Centrist 
Hi Curt — I think increasing minimum wage is usually offered up as one minor piece of multifaceted approaches to reducing income equality (but doesn’t sound that way in campaign trail soundbites). I support it (Wild Roy Kerscher is rolling over in his grave as I type) because I believe everyone should be paid a living wage and because it will pull a lot of families out of poverty. I agree with what you are saying about addressing poverty, but think the change between middle and upper incomes needs to be a huge part of this discussion. Middle incomes have been pretty stagnant for decades and the recovery is not happening for all. I think poverty/absolute well-being is a problem, but I also think the gap is a problem that is having negative repercussions on the economy and society (education, health, political polarization), although I know research on this is mixed. Seems to me the entrepreneurial spirit is alive and well in the U.S., but people’s continuing strong believe in upward mobility no longer jibes with reality. Also — is Wisconsin the neighbor state you reference?
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Kim, remember, your Roy Rolling comments are not new to me. I can still repeat a few ring-dingers from college.
With respect to the neighboring states, yes, Wisconsin and Indiana are eating Illinois’ lunch. Amazon just opened a facility the size of Rhode Island just across the Wisconsin Border to service Chicago because he recognized that the increased cost and time of transit would be offset by lower taxation, corruption, and regulation. Indiana has been taking out billboards in Chicago that say “Illinoyed? Solution Indiana.”
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Dad was just toying with me in college waiting for me to age into his politics 🙂 I don’t know anything about Indiana, but the things I read about Wisconsin from a range of nonpartisan sources don’t paint a good picture….overall economy middling at best, tied for last among Midwestern states in job growth, and median hh income trending down etc.???
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“That is why, according to them, it is so important that we increase the minimum wage.”
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I don’t recall a minimum wage increase being continually, and/or seriously, cited as anything near a “solution” to the wealth gap problem in this country. Nor have I seen it positioned as a, “this is why we need to do it”, argument. I will tell you that it never occurred to me as being worth any serious consideration whatsoever in the argument, as far as being a solution is concerned.
Raising the minimum wage is purely about everyone who is working full-time in this country, being able to earn enough money to just survive. It is neither merely a “convenient”, nor merely an “emotionally satisfying” position to take. It is a moral and ethical one. And, I think, a strong economic one.
Now you COULD argue that morality and ethics are, or should be, non-factors in straight economics theory. I don’t agree mind you, but I get the argument. But, an argument that they should not be factors in informing and defining our policy decisions as a country just seems wrong. (I do realize that you’re not explicitly making this argument, but it seemed to me to be a point worth making in the context of the discussion.)
Now obviously, that doesn’t close the book on whether it will ultimately be a net good or bad on the whole. There are reasonable arguments on both sides, and compromises to be discussed. But, I’d just like to see the argument framed correctly.
One question: do you believe that income inequality is a problem in this country? I couldn’t quite get a feel for that from the post.
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