Income Inequality, Ethnic Diversity, and State Minimum Wages

Objectives The objective of the current study is to examine the determinants of wage floors set by state governments in the United States, with a particular focus on the effects of income inequality and ethnic diversity. Method We estimate the effects of income inequality, ethnic diversity, and their interaction on real state minimum wages using a state‐level panel of Census demographic data from 1981 to 2010. We also control for state‐level demographics and additional state‐level information, such as measures of voter and government liberalism, along with time and state fixed effects. Results We find that the impact of income inequality is mediated by ethnic diversity. When states are highly ethnically homogeneous, increases in income inequality are associated with higher state minimum wages. When states are highly ethnically heterogeneous, increases in income inequality are associated with lower state minimum wages. The impact of income inequality lacks statistical significance when levels of ethnic diversity are either average or somewhat below average. Conclusions Overall, our results suggest that the negative impact on state minimum wages in heterogeneous states could stem from rising income inequality, which increases the social distance between whites and other ethnic groups and weakens mass support for wage policies that are believed by the public to be beneficial to the poor.