Revisiting the Long-Run Relationship between Wage Inequality and Minimum Wage

Abstract

Unlike traditional economists, revisionists claim that non-market factors, such as the falling real minimum wage and unionization in the U.S. labor market, may increase wage inequality, in particular in the 1980s, rather than market factors, such as shifts in labor supply and demand. But even though they do not agree with the revisionists" view, traditional economists have not yet shown explicitly that a falling real minimum wage is unrelated to wage inequality. In this paper, we demonstrate that, using dynamic models, the minimum wage may have a spurious relationship with wage inequality, and that shifts in relative labor supply and demand are still important factors determining wage inequality.