Wage Inequality in the U.S. during the 1980s: Rising Dispersion or Falling Minimum Wage?

Inequality in the unconditional distribution of observed wage rates in the U.S. rose substantially during the 1980s, mostly in the lower tail of the distribution. The causes of this rising wage inequality are obscured by the fact that concurrent decreases in the federal minimum wage tend to increase observed wage inequality, regardless of its effect on employment. This study uses regional variation in the relative level of the federal minimum wage to separately identify the impact of the minimum wage from nation-wide growth in latent wage dispersion during the 1980s. CPS wage data show a tight empirical relation between the relative level of the federal minimum wage and dispersion in the lower tail of the wage distribution, across states and over time. After accounting for the diminishing impact of the minimum wage during the 1980s, the evidence points to little or no increase in wage dispersion in the lower tail of the wage distribution.