Picturing Income Inequality, Part 1

With the increased emphasis on income inequality in both Washington and the media, we are certain to be bombarded with competing partisan and ideological claims about the nature and severity of that inequality. As a political scientist, I'd like to focus on what the data say and in that way hopefully contribute to the civic discourse on the issue. This installment uses data available from the Census Bureau's Current Population Survey (CPS)—one of the key sources of information on income inequality. (For the truly wonkish, I discuss these data in more detail at the end of the post.)

The Bottom Line

The evidence from the CPS data supports the following claims:

• The richest households have a greater share of income today than they did in 1967; everyone else has seen their share go down.
• Average household income has increased across the board, but the growth has been unequal and tilted toward the richest households.
• The top 5% have enjoyed the greatest increase in both share of income and average household income.
• Consequently, there is greater income inequality in the US today than there was in 1967.

The Evidence

Figure 1 graphs the share of income from 1967 to 2012 for American households grouped into five equally-sized groups (quintiles). Two things are apparent in the figure. First, there is a fair amount of income inequality across those years.* Second, the bottom 80% of American households have seen their share of income decrease, while the richest 20% have seen their share go up.

A more intuitive way to understand income shares is to imagine 100 people who together earned $100. We could divide those 100 people into five groups of 20 (income quintiles). An equal distribution of income would result in each group having $20. The data show, however, that in 2012 the top 20 people had $51 collectively, the middle 20 (middle class) had $14, and the bottom 20 had only $3.

More Evidence on the Minimum Wage

In my last post, I offered a quick summary of the evidence regarding the impact raising the minimum wage would have on jobs, poverty, and economic growth. Naturally, President Obama's focus on the minimum wage this week has generated a lot of discussion in the blogosphere. Here's a quick summary of four particularly noteworthy posts.

Alan Manning at the London School of Economics has two excellent posts on the minimum wage. The first points out that the weight of current empirical research indicates that raising the minimum wage won't cost jobs. So why hasn't this conclusion sunk in? 

In spite of this accumulating weight of empirical evidence, it is still very common to find economists falling back on the argument that a minimum wage must cost jobs because demand curves for labor inevitably slope downward. Faced with a conflict between the evidence and 20th-century economic models, they reject the evidence rather than the theory – not an ideal template for scientific endeavor. But there are, in fact, uncomplicated theoretical reasons why the minimum wage set at the levels seen in the United States has little or no effect on employment. Hence the problem may be with the economics all too often taught as dogma. [emphasis added]

His second post offers a concise history of the minimum wage and points out that it is low relative to other OECD nations.

Jared Bernstein at the Center for Budget and Policy Priorities covers much of the same ground I did in my earlier post. His key point:

The question of whether raising the minimum wage reduces employment for low-wage workers is one of the most extensively studied issues in empirical economics.  The weight of the evidence is that (1) for minimum wage levels in the range now being discussed, such impacts are small, and (2) minimum-wage increases of the size enacted in the past, and under the proposals now being discussed, are a net benefit to low-wage workers as a group.  Raising the minimum wage also would modestly lower poverty and help push back against rising inequality.

Finally, John Patty has a post at the Math of Politics that clears up misconceptions about the number of workers who would be affected by a minimum wage increase. Not only would workers making $7.25 or less benefit; those making $7.26 to $10.09 would also see a wage increase. How many people is that?

The Occupational Employment Statistics Query System, provided by the U.S. Bureau of Labor Statistics, provides a different picture of how many people would be impacted by a change in the federal minimum wage to $10.10/hr.

The most recent data, from May 2012, is displayed at the end of this post.  The points I’d like to quickly point out are as follows:

• In Food Preparation and Serving Related Occupations, 50% of 11,546,880 workers receive less than $9.10/hr, and 75% receive less than $11.11/hr.  Thus, somewhere around 62.5% of these workers, or about 5.75 million people would receive a higher wage.
• In Sales and Related Occupations, 25% of 13,835,090 workers receive less than $9.12/hr, and 50% receive less than $12.08/hr.  So, conservatively, about 3.5 million people would receive a higher wage.
• In Transportation and Material Moving Occupations, 25% of 8,771,690 workers receive less than $10.06/hr.  Thus, over 2.1 million people would receive a higher wage.
• In Healthcare Support Occupations, 25% of 3,915,460 workers receive less than $10.03/hr.  That’s nearly a million people who would receive a higher wage.
• Overall, 10% of all workers (across all industries) receive an hourly wage lower than $8.70/hr, and 25% of all workers receive an hourly wage lower than $10.81/hr.  A rough estimate, then, is that at least one out of every six workers would receive a higher hourly wage if the federal minimum wage were raised to $10.10/hr. To put that in absolute terms:

Over 21,500,000 Americans would receive a higher wage.

Misunderstanding the Minimum Wage

In his State of the Union address last night, President Obama called for raising the minimum wage to $10.10 by 2015, reiterating a theme from a speech last December. Moreover, the President said he would bypass Congress by executive order to do just that for federal contract workers.

This seemed like a good time to address questions and concerns that many have by reviewing the most recent evidence regarding the minimum wage. My review indicates that arguments against raising the minimum wage aren't supported by the evidence and that the benefits from doing so seem to outweigh the costs.

First, some historical perspective. The minimum wage today in real terms (controlling for inflation, which is necessary when comparing dollar amounts over time) is less than it was at its peak in 1968 ($10.77), but greater than it was when first implemented in 1938 ($4.08).

Below I provide a brief summary (with extensive quotes) of a review done last December by Laura D. Tyson, a Professor of Business Administration and Economics at the University of California, Berkeley, and a former chair of the Council of Economic Advisers for President Clinton. Another excellent review making many of the same points can be found in the January 24, 2014 issue of CQ Researcher (gated).

The evidence:

• Raising the minimum wage won't increase unemployment. According to Tyson, "The weight of the evidence consistently finds no significant effects on employment when the minimum wage increases in reasonable increments."

Stuck in the Middle: Protests in Brazil and Turkey

Emerging markets, middle powers, whatever term you want to use to describe countries on the relative rise in terms of power, the bottom line is that two of the poster children for the new century are seeing some growing pains. Brazil and Turkey, along with other countries like Indonesia and the Philippines, are growing in terms of both their stock markets and their geopolitical significance. But, as recent events have shown, something is afoot in the middle powers.