Good for Workers, Not for Equity

Jonathan Cogliano, economics

by Jonathan Cogliano, assistant professor of economics

Recent arguments in favor of or against a minimum-wage increase rest on some prior beliefs about the nature of how overall demand and gross domestic product (GDP) respond to changes in distribution. The proposed increase to the minimum wage can be thought of as a small change in distribution. These prior beliefs fall into two categories: (1) that demand is wage-led and responds positively to increases in the wage-share of output, or the percentage of GDP that goes to household wages; and (2) that demand is profit-led, responding positively to redistribution toward the profit-share of output, or the percentage of GDP that goes to profit.

Arguments in favor of increasing the minimum wage because it’s good for the economy imply a wage-led demand regime—a situation in which economic activity has a strong response to wages and the response of investment to the profit-share is relatively weak. Arguments against increasing the minimum wage imply a profit-led regime in which investment responds strongly to profitability, thereby inducing better economic performance.

Regardless of which side of the debate one falls on, the increase to the minimum wage will be unambiguously good for workers who depend on it. A higher minimum wage will mean quite a lot to the 3-4 million American workers at or below the current minimum wage.

However, the proposed increase does not go far enough to remedy our problems of inequality. The number of minimum-wage earners is small relative to the entire employed U.S. labor force. Policies more specifically targeted at increasing the labor-force participation rate or the overall employment-population ratio could do more to alleviate inequality. To really start fixing inequality and to restore a robust middle class, policies should take aim at improving the situation of the lower-40 percent of households in the income distribution, which could hold overall positive effects on the U.S. economy.