Welfare Effects of Minimum Wage and Other Government Policies

The minimum wage, unlike most government transfer programs, lowered welfare in the 1980s and 1990s as measured by all commonly used welfare or inequality measures, including various Atkinson indexes, the Gini index, standard deviation of logarithms, and others. The effects of most government programs, macroeconomic variables, and aggregate demographic characteristics were qualitatively the same for all the inequality measures. Do government programs such as minimum wage laws, Aid to the Families with Dependent Children/Temporary Assistance to Needy Families, Food Stamps, Unemployment Insurance, Earned Income Tax Credit, and Supplemental Security Income raise welfare by redistributing income? At first glance, asking this question may seem pointless because the answer may vary with the measure of equity used. However, we show that all the well-known equity or welfare measures give the same qualitative answer for almost all the policies.1 Moreover, we demonstrate that the minimum wage — in contrast to most government transfer programs — lowers welfare. We use all the common, traditional welfare measures: Gini index, coefficient of variation of income, relative mean deviation of income, and standard deviation of the logarithm of income. We also use the Atkinson welfare index, which has four desirable properties. First, the Atkinson welfare index has a dollar-denominated interpretation. Second, the measure for the entire population can be decomposed into within-groups and between-groups welfare measures for subgroups of the population. Third, changing the single parameter that indexes the Atkinson measure changes the weight the welfare index places on relative increases of wealth at the lower end of the income distribution. Thus, by varying this parameter, we can examine the effects of government policies over a range of social welfare functions. Fourth, the Atkinson measure can be derived axiomatically to be consistent with a welfare maximization model. We examine how differences in government policies and macro and demographic variables over time and across the fifty states affect welfare. Though we evaluate seven government policies, we emphasize the welfare effects of the minimum wage. Most of the enormous 1Dalton (1920) suggested that all common welfare measures would give the same rankings “in most practical cases.” However, Yntema (1933), Ranadive (1965), and Atkinson (1970) show that they give different rankings. Instead, we show that, empirically, changes in government policies (and macroeconomic and aggregate demographic variables) change the rankings of almost all measures in the same direction.