Which Policies Reduce Income Inequality?

Adjusted for inflation, today’s federal minimum wage of $7.25 per hour is 23% lower than it was in 1968. If it had kept up with inflation and with average productivity growth, it would be . At the current minimum wage, a worker employed full-time for a full year earns only $15,080 – 19% below the poverty line for a family of three.

According to the OECD, the US has the (the share of the population that earns less than half of the national median income) among developed countries. suggests that an increase in the minimum wage would have a powerful positive effect, with a 10% increase cutting the poverty rate by 2%.

Indeed, about 30 million workers would benefit from an increase in the minimum wage to $10.10 per hour, as proposed by Congressional Democrats. Of these, 88% would be at least 20 years old (with an average age of 35); 55% would be working full-time; 56% would be female, and more than 28% would be parents. Putting would not only reduce poverty; it would stimulate consumer spending at a time when inadequate demand continues to impede recovery and job creation.

President Obama has made significant progress combating income inequality. Under his leadership, the federal income tax system has become more progressive, and Obamacare is the most progressive social-insurance program since Medicare and Medicaid began in 1965. But there is far more to do. Raising the minimum wage is the right next step.

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

Copyright: Project Syndicate, 2013.