The Distributional and Efficiency Effects of Increasing the Minimum Wage: A Simulation

Abstract

The generally accepted goal of minimum wage laws is to alter the distribution of income in favor of low-income households. However, since a minimum wage will also disrupt low-wage labor markets, causing inefficiencies and imposing costs on some of the same workers the law is intended to help, an evaluation of the policy requires a weighing of the distributional benefits against the efficiency costs. Quantification of these benefits and costs is clearly important to this evaluation. While much effort has been devoted to estimating the employment effects of minimum wage laws, relatively little work has been done to estimate the distributional benefits. Our simulations focus on this efficiency-equity tradeoff by developing estimates of the impact of an increase in the minimum wage on the level and distribution of real income across households. Previous work has concluded that minimum wages are not as beneficial in their distributional impact as generally supposed.'