The Causes of Wealth Inequality (6): Minimum Wage Decline and Tax Policy

This post picks up where some previous posts investigating the possible causes of wealth or income inequality left off (see here, here, here, here and here). In those previous posts we identified the following causes:

• globalization (i.e. outsourcing, trade liberalization) and the resulting competition between low-skilled workers in the West and in development countries
• competition between low-skilled workers in the West and immigrants (although there is also evidence that this doesn’t have a large effect on the wages of the low-skilled)
• the development of technology and a decreasing demand for low-skilled workers
• the increased importance of cognitive skills relative to physical labor
• declining manufacturing employment
• shrinking unionization and fragmentation of collective bargaining
• changes in household size and composition (due to later marriage and more prevalent divorce, more and more households have just one adult, and hence only one potential earner)
• coupling between people with similar education and thus similar earnings potential (“marital homogamy”)
• “positive feedback”: wealth begets wealth.

Regarding the situation in the U.S. (where the level of inequality is relatively high, see here, here, here and here), we can add two more causes: a decline of the minimum wage (inflation adjusted), and large reductions of the tax rates of the wealthy in the 1980s, 1990s and during the presidency of G.W. Bush.

minimum wage in the U.S., nominal and adjusted for inflation

top marginal income tax rate and effective tax rate on top 1%

(source)

The combination of these two policy choices logically increases inequality.

More on minimum wages in the U.S. here. More on taxing the rich here, on progressive taxation here, and on taxation in general here. More on income inequality is here. Something on the related topic of the causes of poverty is here.