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Low-Wage Labor Markets and the Power of Suggestion

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  • Natalya Y. Shelkova

    (University of Connecticut)

Abstract

Low-wage labor markets are traditionally viewed as competitive, and the possibility of strategic behavior by employers is dismissed. However, such behavior is not impossible. This paper investigates the possibility of tacit collusion by low-wage employers while setting wages. A game-theoretic explanation along the lines of the Folk theorem is offered, suggesting that a non-binding minimum wage may serve as a focal point for tacit collusion, proposing a symmetric solution to an infinitely played game of wage-setting. Several empirical techniques were employed in testing the hypothesis, including hurdle models of collusion. CPS monthly data is used for the years 1990-2005, covering the last four federal minimum wage increases. The likelihood of collusion at minimum wage is evaluated, as well as its dynamics during this period. The results generally support the collusion hypothesis and suggest that employers respond strategically to changes in minimum wage legislation while using the statutory minimum wage as a coordination tool in tacit collusion.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2008-33.

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Length: 48 pages
Date of creation: Sep 2008
Date of revision: Dec 2008
Handle: RePEc:uct:uconnp:2008-33

Note: I thank my adviser Christian Zimmermann for advice and support; professors Alpert, Couch, Dharmapala and Furtado for their discussions and comments; participants of the 2008 IRS Sundance Conference on Monopsony, particularly David Card, 2008 SOLE meetings, 10th IZA Summer School in Labor Economics, and UConn brownbag seminars for their input. All remaining mistakes are my own.
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Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
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Web page: http://www.econ.uconn.edu/
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Related research

Keywords: minimum wage; low-wage markets; collusion; tacit collusion; focal points;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The minimum wage lowers wages
    by Economic Logician in Economic Logic on 2008-10-24 13:02:00
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Cited by:
  1. Pedro Gonzaga & António Brandão & Hélder Vasconcelos, 2013. "Theory of Collusion in the Labor Market," FEP Working Papers 477, Universidade do Porto, Faculdade de Economia do Porto.
  2. Peter Elek & Janos Kollo & Balazs Reizer & Peter A. Szabo, 2012. "Detecting Wage Under-Reporting Using a Double Hurdle Model," Budapest Working Papers on the Labour Market 1201, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Natalya Y. Shelkova, 2009. "Collusion at the Non-Binding Minimum Wage: An Automatic Stabilizer?," Working papers 2009-41, University of Connecticut, Department of Economics.
  4. Elek, Peter & Kollo, Janos & Reizer, Balázs & Szabó, Péter A., 2011. "Detecting Wage Under-reporting Using a Double Hurdle Model," IZA Discussion Papers 6224, Institute for the Study of Labor (IZA).
  5. Natalya Y. Shelkova, 2009. "The Minimum Wage Spike in the Search Economy with Wage-Posting," Working papers 2009-40, University of Connecticut, Department of Economics.

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