The Contribution of Minimum Wages to Increasing Wage Inequality

There has been much attention for the causes of the increase in wageinequality in the United States since the mid seventies. DiNardo,Fortin, and Lemieux (1996) showed that minimum wages can explain 25%. The present paper uses a more general approach requiring noassumptions on how minimum wages affect wage distribution and returnon human capital. Applying this methodology to the United States forthe period 1973-1991 shows that the rise in wage inequality duringthe eighties can be largely explained by the decrease of minimumwages in that period. The compressing effect of increasing minimumwages is felt at wage levels up to at least twice the minimum.