The minimum wage, bargaining power, and the top income share

Abstract

Much of the argument in support of the minimum wage is its ability to lift workers out of poverty. But the minimum wage also has the potential to influence the relative bargaining power between (non-union) workers and firms and historically this was one of its main purposes. In this paper, we review how the minimum wage can improve workers’ bargaining position. We use a state-level panel data set that exploits differences in the minimum wage at the state level to show that higher minimum wages, along with unionization rates and higher top marginal tax rates, are successful in reducing overall income inequality, mainly by reducing the share of income going to the top 1% of the income distribution.

Keywords:

• minimum wage
• inequality
• bargaining power
• poverty

Notes

1 According to the BLS (2014), 4.3% of workers earned the minimum wage or below. This was down significantly from a high of 13.4% in 1979, implying that the real minimum wage may be falling toward workers’ reservation wages.

2 Scholz (1994), Neumark and Wascher (2001), and Hoynes, Page, and Stevens (2006) all find that the EITC is effective in reducing the poverty rate.

3 http://www.aflcio.org/Issues/Jobs-and-Economy/Wages-and-Income/Minimum-Wage

4 Lee (1999) and Autor, Manning, and Smith (2016) warn against fixed-effect regressions in this type of analysis as it potentially leads to upward bias in the estimated coefficients. Autor, Manning, and Smith (2016) use an instrumental variables approach. But the test of their approach (as suggested in Lee (1999)) is that it “finds no impact of the minimum wage on the upper tail of the wage distribution.” (Autor, Manning, and Smith 2016, p.3). But this conflicts with our hypothesis. We, in fact, expect to see an effect of the minimum wage on the upper tail of the wage distribution, and so must find a different approach. We also use a GMM Arellano-Bond regression as a check on these fixed-effect regressions.

5 It’s also possible, of course, that there is some other variable affecting both the minimum wage and the top income share that we have not accounted for.