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Minimum Wage and Inequality

Journal of Labor Economics

In a paper “The Minimum Wage and Inequality: The Effects of Education and Technology” published  in the Journal of Labor Economics, in January 2016, Zsofia Barany – researcher at the Sciences Po Department of Economics – takes an original and comprehensive approach to the relationship between minimum wages and wage inequality and finds unexpected results.

Indeed, the general consensus in the literature is that  « minimum wages truncate the distribution of wages, and only affect those, for who this wage is (close to) binding. » The driving force behind the changes in the structure of wages, i.e. increasing inequality in both the low AND top end of wage distribution, is the increasing demand for high-skilled workers.

But, Zofia Barany underscores the fact that « the truncation of the wage distribution, by imposing a minimum wage, affects skill prices and therefore changes the incentives that people face when making educational decisions… as the supply of skills affects the evolution of technology, and in turn the technology affects educational decisions, there is a feedback mechanism between them. Therefore… these two forces can either reinforce, or mitigate, the initial impact of minimum wages on inequality. »

In order to correctly understand the impact of falling minimum wages – a documented 30% decline in the 1980s – on wage inequality, it is important to look at the ‘whole’ picture by using a general equilibrium model that builds in the supply of high-skilled workers and the direction of technical change. The literature usually treats these two variables as exogenous and focuses on the lower end of wage structure.

So how do minimum wages really affect wage distribution when education and technology are factored into the model? Zsofia Barany concludes: « … that even though minimum wages affect the bottom end of the wage distribution more, their impact on the top end is significant as well. »

Read the full published article (restricted access for Sciences Po readers)

Read the pre-print (Pdf, 590 Ko), open access

More about Zsofia Barany and her research