Because of the possible intrusion of the government in the market and supporting increases because of the assistance from the government (Poole 1991). Aside from politics, economic interests may contribute to the opposition towards minimum wage. People often believe that the main concern is the potential for minimum wage to increase the pay of those earning about the statutory minimum through the effects of wage contour.
Ironically, the accepted wage floor theory understands these effects: minimum wage raises are viewed to be counterproductive because of the possible increase of “inflationary” pressures (Neumark & Wascher 2004). It is necessary for this debate to be broadened. Evidence has challenged the typical understanding about the presence of meaningful employment effect (Krueger et al. 1995 & Waldman 1999 & 2000). Concerning contours, the effects have now been more than a speculation because of the insufficient quantities of ideal contour data. This may be convenient of those who benefit from this typical understanding, but this is not the way to go about making policy.
The wage floor is set by minimum wages, which a worker can not accept employment if below the rate of pay. Unionized firms use collective bargaining to create wages for its employees. Without a union the minimum wage for workers, through the forces of law, achieves what unions may have achieved through collective bargaining. In this case minimum wage should be looked at as a legal measure that accomplishes the same goal that unions have achieved by discussing pay with individual employers, for the greater group of workers (Tarling & Wilkinson 1997).
The main purpose of the Fair Labor Standards Act was indeed to protect the unorganized people who lacked the power to bargain and negotiate sufficient wages for themselves (Miller 1999).It is clear now that institutions in the labor market like unions and minimum wage play a role in achieving wage equality. As the influence of such institutions decline, income inequality increases (Machin 1997; Fortin & Lemieux 1997). A raise in the minimum wage would provide additional wage growth in areas of recurring stagnation (Gottschalk 1997).
Wage contours are considered institutional features of the labor market. These contours were once defined as the similarities between the characteristics, the institutions, and the wages of workers. Each group of workers would have wage rates surrounding a particular reference point, which would be affected by changes within the reference point or key rate (Dunlop 1957). These rates were sought to vary from one industry to the next. However, wages are mainly determined in institutions rather than in the marketplace (Waldman 2002). This means focusing only on people earning a statutory minimum is too narrow to try to determine the use of minimum wage as a tool for fixing inequality and the low wages of workers. David Gordon infers that decreases in the value of minimum wage over time affects not only those who are paid the minimum, but also those who earn wages higher than that minimum. Yet, those earning more continue to have less buying power than minimum wages provided before inflation.
Gordon argues that increases in wages may lead to pressures on other wages due to employers feeling “pressured to pay more to their employees, even if they’re not directly affected by the statutory increase, simply to ensure that they’re able to continue hiring and employing the quality of workers they prefer.” Therefore, the scope of minimum wage depends on its impact on statutory minimum wages and above (Gordon 1996). The fact here is that there cannot be accurate measurements of the minimum wage population unless one stops looking at the minimum wage in statutory terms and more in real terms. For example, according to the Integrated Public Micro-use Data Series, Levin Waldman argued that a minimum wage increase would bring on more effects than supposed because the amount of people earning near the wage range was really larger than what was sought to be (Waldman 2005).
Bruce Klein and William Spriggs similarly suggest that minimum wage’s most important function is being a reference point for wages. Their research claims that firms maintain their wage structures due to statutory minimum wage changes. There is a chance of possible disemployment because of the increases, but those effects are insignificant. Instead, firms used minimum wage as a reference point for starting pay wages. Thus, suggesting a wage contour effect: when the statutory minimum increases, starting wages do too, shifting the wage structure in an upward motion (Spriggs & Klein 1994). William Wascher, David Neumark, and Mark Schweitzer have conducted research about wage contour effects.
Along with their conclusion that minimum wage affects workers, they note the findings of wage contour effects in those people earning more than the minimum wage. Nonetheless, they conclude that because workers who are unemployed are restrained from negotiating a low wage that would lead employers to demand their services, wage floors create low employment rates. Low wage workers were in the end hurt when wages were increased because of the loss in hours (Schweitzer et. al 2004). Still, there are two categories in workers wages, wage ranges or contours, creating other shifts whenever the minimum wages shift.
In order to understand how minimum wage effects the middle class we must distinguish the difference between statutory minimum wage and “effective” minimum wage populations. Those earning above the statutory minimum wage and considered the effective minimum wage population. According to the IPUMS from 2000, there were “two wage contours starting with the statutory minimum wage of $5.15 an hour and spanning 25 percent. The first contour includes all those earning between $5.15 and $6.44, which is $10,712–$13,395 annually.
The second contour includes all those earning between $6.45 and $8.25, which is $13,396–$17,160 annually” (Waldman & Whalen 2007). Contrary to the belief that many minimum wage earners are not considered primary earners, the data above suggests that wage earners in the first and second contour are actually primary or essential secondary earners. People who earn a little less than 50% of their family’s total income could be secondary earners because their contributions to their family’s income is necessary. The first two contours prove that “effective” minimum wage populations take up a larger percent of the labor force than statutory minimum wage populations.
It is obvious that low wage earners would gain more from a wage increase, but the contour theory suggests that others would also benefit. If the wage floor is raised, wage contours would pressure other employers to raise their wages, increasing wages for a large majority of the workforce. This would help to prevent the continuance of stagnation in the wages of the middle class. One reason that stagnation in the middle class has existed for such a long time is due to the mere fact that public policy allowed the real value of statutory minimum wage to fall through its cracks (Mishel 2007).
The purpose of minimum wage was not technically to benefit the poor, but primarily for economic performance. High wages were meant to stabilize the effect of consumer spending. The more money put into workers, the more willing they are to spend, which in turn helps the economy by increasing the supply and demand for goods and services (Waldman 2001). Creators of the FLSA understood how wage contours worked. When there was heavy competition in the workforce, cutting down wages, the federal law sent the wave in the direction of the poor workers and eventually into the middle class. For example, when collective bargaining had not yet existed, employers determined the outcomes of the labor market.