Minimum Wage and Income Distribution

Abstract

To the extent that the minimum wage can reduce income inequality through its wage contour effects and it affects the broader middle class, it may challenge some of the fundamental assumptions of the median voter theorem. Based on Anthony Downs’ (1957) model of political competition, the median voter theorem holds that as income distributions are skewed to the right, the preferred amount of redistribution is a function of the relative position of the median voter on the income scale. The greater the distance between the median voter’s income and society’s average income, the greater is society’s preferred amount of redistribution. The fundamental assumption being that redistribution will take place through taxation. Data from the Current Population Survey, however, shows that the minimum wage’s welfare effects potentially mitigate the need for redistribution because the distance between the median voter’s income and the average of society is effectively narrowed. In Chap. 3 we discovered that in years when the minimum wage increased inequality declined to some extent. In this chapter we take a closer look at the impact of the minimum wage on income distribution and how it impacts inequality. As a solution to growing inequality the minimum wage does not figure prominently in contemporary policy discussions; rather the discussion focuses on redistribution, which is also assumed by the median voter theorem. Most policy approaches to income inequality center on rates of taxation, on the assumption that income inequality can easily be addressed by overtaxing the wealthy in order to pay for programs that will benefit those at the bottom. Ideology aside, this approach follows the assumptions of the median voter theorem based on the public choice theory put forth by Anthony Downs (1957). Downs essentially postulated that political actors, including public officials, governments, and political parties behave rationally. So too do voters. Each pursues his or her self-interests. Voters vote for the candidate and/or party that will satisfy their interests. Because the goal of each political party is to win elections and not programs and/or policies, those running for election will effectively purchase the votes of voters through public programs and/or other policies that effectively increase their money utility. According to this model of political competition, the median voter theorem, based on the work of others using the same public choice assumptions as Downs, holds that as income distributions are skewed to the right, the preferred amount of redistribution is a function of the relative position of the median voter on the income scale. The greater the distance between the median voter’s income and society’s average income, the greater is the society’s preferred amount of redistribution. In other words, the more inequality there is, the greater preference the median voter has for redistribution. The fundamental assumption being that redistribution will take place through taxation. In this chapter, I argue that to the extent that the minimum wage can reduce income inequality (and not to be confused with making society equal) through its wage contour effects and it has positive effects for the middle class, it may challenge some of the fundamental assumptions of the median voter theorem. I argue that the minimum wage’s welfare effects potentially mitigate the need for society to redistribute because the distance between the median voter’s income and the average income of society is effectively narrowed, which is to say, if the money utility of those at the bottom can be increased through an increase in the minimum wage than simply overtaxing the wealthy.