Labor market institutions such as unions and the minimum wage do make a difference with regards to overall wage structure and achieving a more equitable distribution. The minimum wage, for instance, is not only about helping the working poor to earn a wage above the poverty line; it is also about shoring up the middle class through wage contour effects. A minimum wage is effectively able to accomplish for non-unionized workers what labor unions have traditionally been able to accomplish for their members: it gives them a sense of voice by establishing a set of standards through the force of law, which is also enforceable by the state. This becomes even more important in an era of declining unionism. Because the minimum wage has all too often been conceived of narrowly as primarily an anti-poverty measure, its broader implications have been overlooked. The broader implications have also been missed because of our narrow construction of the minimum wage population as only those earning the statutory minimum, and not those who are earning an effective minimum.
Were we to conceive of the minimum wage in terms of contours, we would be able to understand just how important the minimum wage is as a labor market institution that can serve as a bulwark against stagnating middle class wages. In the 1950s John Dunlop developed the concept of a wage contour to explain how a firm's internal wage structure might be as much affected by external forces as internal ones. A wage contour would be defined as a group of workers with similar characteristics working in similar industries and earning similar wages. For each group there would be a group of rates surrounding a key rate, and these group rates would be affected by changes in the key rate. The key rate was essentially to be defined as any rate serving as a reference point in a particular industry. A minimum wage can similarly be viewed as a reference point for what others in similar industries and occupations ought to be paid.
If we took the wage distribution and divided it into contours, it would look something like this: the first contour would be comprised of those earning in a wage interval between the statutory minimum wage to about 25 percent above. The second contour would pick up at the end of the first and range to about 25 percent above that. The third would range to 25 percent above that, and so on. This naturally encompasses a broader segment of the labor market. But even looking at the first contour, for instance, an "effective minimum wage" population will emerge as those earning the median of the first wage contour. As a raise in the statutory minimum wage results in a raise in the "effective" minimum wage, it is also likely that there will be resulting increases in the median wages of at least the second and third contours, and perhaps more.
Using census data from 1962 to 2008, I divided the income distribution into ten contours, which ultimately encompassed up to 70 percent of the workforce. And it should be kept in mind that those earning in the 10th contour were earning around $100,000 a year. In years when there was no increase, median wages remained unchanged for the most part. During periods when there had been no increases in the minimum wage, such as from 1981 to 1989, for instance, there had been no increases in median wages. The minimum wage, in other words, has broader effects than commonly supposed. Contrary to the neoclassical model that holds the minimum wage to have adverse employment consequences, the minimum wage has positive welfare benefits for the middle class. That there were no increases in median wages during those years when there were no minimum wage increases, suggests that wage stagnation may well be attributable to the absence of a wage policy.
Therefore, President Obama's proposal to index the minimum wage has considerable merit. A minimum wage that would keep up with say the rate of inflation might well put an end to wage stagnation at the bottom of the wage distribution and among the lower middle class. As such, there are overall macro welfare benefits that cannot be overstated.