Guest Column

Michigan's minimum wage and income inequality

July 25, 2014
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No matter how you spin, slice, or season the data, it comes out looking the same: Income disparity has grown since the mid-1970s. 

The Gini coefficient, a common measure in determining inequality, was at a record high last year for the U.S., and when compared to the U.K., Germany and France, we come up more unequal.

You would think the 100 percent uptick in the stock market over the past three years would have evened things out more. Nevertheless, 95 percent of the gains of the recovery have gone to the wealthiest 1 percent of the population, and their share of overall income has increased to 22 percent.

It can be effectively argued that nothing is wrong and much is right with income differentials given that money is a positive motivator. The elimination of wage and salary differentials from the payroll landscape would dampen employee morale, be accompanied by smaller gains in productivity, and not accurately reflect the marginal product of labor.

It’s both easy and quite natural to focus on the issue of disparity and make redistributive attempts at solving it, whereas a more important concern is the issue of social mobility. Sen. Marco Rubio could very well be right when he says, “It’s not that the rich are doing too well, but that the impoverished are trapped.” This idea is substantiated in that American children born into poverty are five times more likely to be poor than children who are not born into poverty.

Christine Lagarde, managing director of the International Monetary Fund, Pope Francis and President Obama all agree that inequality threatens our social fabric and the prospects for future economic growth. Their solutions include methods of income redistribution in the form of more progressive tax codes and higher minimum wages, along with various social and educational programs. And while most reading this would agree these approaches aren’t optimal, few are coming up with sound alternatives to the problem, thus, those on the “left” have taken center stage.

An increase in the minimum wage, at either the state or federal level, is of little economic consequence and can be viewed as primarily politically motivated. There would be fewer objections to an increase if the Pareto criterion could be met whereby making some people better off wouldn’t make anyone worse off. But that is not the case and is supported by both the Congressional Budget Office and the IMF findings that the net effect of an increased minimum wage is ambiguous; people will be lifted out of poverty at the expense of more people being unemployed.

The fallacy of an increase in the minimum wage is that it’s unrelated to labor productivity and does not reflect an understanding of equilibrium wages. If the median wage is above the new minimum wage, then the increase will have a negligible impact on wages or employment. Such is the case in Michigan where the median wage of even those lowest on the pay scale is above the minimum. The average wage for fast food cooks in Grand Rapids is $8.53 and for food preparation and service jobs, $9.86. While it might seem reasonable to put someone on better financial footing by paying them more, those human jobs that are repetitive in nature could be and in fact are being replaced by automation.

If the issue is one of economic mobility and not income disparity, then what are the chances for someone in West Michigan moving ahead? If parents in Grand Rapids are in the bottom 10th percentile of income, the child is likely to end up in the 35th percentile by age 30. The odds of upward mobility get worse as you look at moving into the top 20th percentile. A child in the Grand Rapids area raised in the bottom 5th percentile rising to the top 20th percentile ($70,000 annual income) only has a 5.8 percent chance of doing so by age 30. So while there is income mobility in West Michigan, there’s a low probability of getting into the top tier when starting from the bottom.

One proven way to lessen income disparity is by having more people complete a bachelor’s degree. Occupations for college graduates tend to be higher paying, involve more creativity, are less routine, and subsequently less subject to automation. If fewer go to college, then the pay gap will only worsen between those with four-year degrees and everyone else. In 2013, the gap reached a record high with college graduates working hourly jobs making nearly double those without a degree.

Recent research suggests social mobility is higher in places with good schools, strong families, community spirit and smaller income gaps within the middle class. It appears that Grand Rapids, ranked No. 1 in the country by Forbes for raising a family, is on a faster track than most cities in reducing income disparity. And when it comes to college education and its ability to help bridge the income gap, our area is an academic mecca.

Promoting opportunities for all of our citizens by encouraging college education and doing our part to keep Grand Rapids a healthy and vibrant family community with good schools will result in further economic growth.

K. Brad Stamm is a professor of economics at Cornerstone University in Grand Rapids.

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