Minimum Wages and Income Inequality in the American States, 1960-2000

Income inequality is one of the central concerns of sociologists and stratification researchers. While most of the analyses in sociology cover the economic and demographic influences on income inequality, less research has sought to understand the impact of public policies. A major factor absent from the research in both economics and sociology is the role of state-level minimum wages. Neoclassical economic theorists hypothesize that a minimum wage will increase income inequality, while institutional economists argue that a minimum wage reduces economic inequality. This paper uses decennial state data covering 1960-2000 to test the hypothesis that states with higher minimum wages have lower levels of family income inequality. The results confirm the institutional hypothesis that state minimum wages reduce family income inequality. Estimates presented in the paper indicate that the effect of the state minimum wage is non-linear and it should be greater than $4.00 (2001 CPI) to be redistributive.