Growing Wage Inequality, the Minimum Wage, and the Future Distribution of Retirement Income

Wage inequality in the United States has been rising since the 1970s. Although its growth has slowed in recent years, the forces driving wage inequality persist. Increased wage inequality has especially hurt workers near the bottom of the wage distribution, where inflation-adjusted earnings have fallen over the past few decades. Changes in the distribution of wages shape workers’ lifetime earnings and affect the distribution of retirement income. People who experience high wage inequality during their working years are likely to experience high retirement income inequality, because Social Security benefits are tied to lifetime earnings, and people’s ability to save for retirement depends on how much they earn.

This study examines the effect of rising wage inequality on lifetime earnings and future retirement income and evaluates the potential effectiveness of the federal minimum wage in mitigating the distributional consequences of rising wage inequality. The analysis uses the Urban Institute’s Dynamic Simulation of Income Model 4 (DYNASIM4) to project future earnings and retirement income over a 70-year period under the assumption that wage inequality continues rising and compares outcomes with the baseline in which wage inequality remains constant at today’s level. The study also projects future earnings and retirement income under the assumption that the federal minimum wage increases in 2017 from its current value of $7.25 per hour to $12 per hour and subsequently adjusts with inflation.

The Urban Institute